Transcript: Statements by Rep. Shelley Moore Capito (R-W.V.) on government conservatorship of Fannie Mae & Freddie Mac

Edited by Jenny Jiang

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

…As have been said many times here, we’ve seen many changes to our regulatory structure here in the financial realm but in some cases layered on too heavily for our institutions to be able to lend adequately.

But one thing we have not done is to address the chief underlying cause of the crisis and that’s our housing finance system.

The objectives that led Fannie and Freddie to assume such considerable risks and size in the market led ultimately to a taxpayer bailout – rescue by the taxpayer.

So we’re 4 years later and it is unacceptable that we have not reformed and made a business model available to housing finance. And today, we have left the taxpayers to pick up $187 billion in Treasury support.

The practice of privatizing gains and publicizing losses is unfair to the American people and meaningful reforms must reflect this.

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

Rep. Shelley Moore Capito (R-W.V.):
…You’ve talked about re-shaping and re-positioning the GSEs [government sponsored enterprises].

One of the great questions that I think we have for our committee, and you’ve asked for congressional guidance, is what’s the timing aspect of this? Because I think we all realize if the timing window is too short, we could really harm the housing market, which I don’t think anybody wants to do. If it’s too long, are we ever going to get there? So how do we find that sweet spot of the timing of winding down and letting the private market maybe take more of that space and I’d like to hear your thoughts on that question.

Edward DeMarco:
Well, I think that’s a very fair concern given the trauma that our country’s housing system has gone through. But now that we are 4.5 years into the conservatorship, we clearly are seeing signs of recovery in housing across most of our markets in the United States so I do believe that it is certainly time to begin that gradual stepping back and that is what we are doing is to try to do that, get it started, do it gradually. But I also believe it’s a multi-year venture to do that and I think some of the things we are doing are multi-year ventures. It is going to take time for us to fully build out this platform and have it fully operational, and the steps we’ve outlined with regards to contracting the enterprises’ footprint in the marketplace is meant to be gradual so that this is done, you know, slowly over time so that we don’t disrupt the recovery of the marketplace and so that investors can gradually get comfortable and step back in.

Rep. Shelley Moore Capito (R-W.V.):
I know you’re not going to react to specific time frames but a 5 to 10 year or are you talking 10 to 25 years?

Edward DeMarco:
I would like to see this within 5 years. I wouldn’t even go 5 to 10. I think we should be moving ahead now.

Rep. Shelley Moore Capito (R-W.V.):
…The CFPB [Consumer Financial Protection Bureau] a rule on the QM [qualified mortgage] and my understanding is that…if your loan is securitized by Fannie or Freddie, you’re automatically considered a qualified mortgage. In my view, I think this leads to more expansion of Fannie and Freddie participation because the lenders going to want a QM, the borrowers going to want a QM for a lot of different reasons. Do you have any thoughts on that issue?

Edward DeMarco:
Well, this is a pretty fresh rule and we are actually analyzing it to understand the CFPB’s – the way the define QM outside of the GSE realm and then looking at what their underwriting rules of Fannie and Freddie are that go beyond QM, and we’re actually re-examining this to get a sense of what this impact looks like. Because, yes, to your point, in some sense it appears at least to run counter to the notion that we’re trying to contract the significance of Fannie and Freddie in the marketplace.

Rep. Shelley Moore Capito (R-W.V.):
Do you anticipate that Fannie and Freddie would – because they’re going to write their own rules for a QM or have their own parameters. Is that correct?

Edward DeMarco:
Well, they have their own underwriting rules. So we are looking at that in light of what the CFPB has determined as appropriate to define QM in the non-GSE realm.

Rep. Shelley Moore Capito (R-W.V.):
Do you there could be a scenario where you could have a QM – you have a qualified mortgage in one scenario but in the Fannie and Freddie realm, it’s not quite a QM? I mean, to me, that would lead to massive confusion.

Edward DeMarco:
Well, let me put it this way. The way the CFPB has written this rule is that right now a mortgage that is not otherwise a qualified mortgage could be so if it passes through Fannie and Freddie’s automated underwriting system.

Rep. Shelley Moore Capito (R-W.V.):
…In my opening statement I talked about the $187 billion [taxpayer bailout]…and then we’ve talked about the $9.6 billion in net income over the last several quarters. What does that $9.6 billion actually go to? Does it ever touch that $187 billion? Will it ever if it keeps generating profits? I guess what I’m asking is is the taxpayer ever going to get their money back?

Edward DeMarco:
So the amount that the taxpayers put in with regard to covering the losses of Fannie and Freddie – that amount is not being reduced through these dividend payments. The taxpayer is getting back a return on the capital that’s put in. It’s the dividend on the capital put in, but it is not a repayment of that capital. We’re not lowering the amount that is owed to the Treasury Department under the senior preferred agreement.

Rep. Shelley Moore Capito (R-W.V.):
If the improvements continue, would that be a scenario where the principal would begin to get repaid?

Edward DeMarco:
That’s not how the agreement is structured.

Rep. Shelley Moore Capito (R-W.V.):
That’s not the agreement. Okay. Thank you.

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