Original posted on Lexology by Sean Whittington:
Yesterday, the House Committee on Financial Services held a hearing on the future of housing finance through Government Sponsored Enterprises (GSEs), including Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks. The Committee heard testimony from the following witnesses: Panel One:
- Timothy F. Geithner, Secretary, U.S. Department of the Treasury
- Sarah Rosen Wartell, Executive Vice President, Center for American Progress
- Michael Berman, President and Chief Executive Officer, CWCapital, on behalf of Mortgage Bankers Association
- Mark A. Calabria, Ph.D., Director, Financial Regulation Studies, Cato Institute
- Vincent O’Donnell, Vice President, Affordable Housing Preservation Initiative, Local Initiatives Support Corporation (LISC)
- Robert E. DeWitt, President, Chief Executive Officer, and Vice Chairman, GID Investment Advisers LLC, on behalf of National Multi-Housing Council
- Janis Bowdler, Deputy Director, Wealth-Building Policy Project, National Council of La Raza
- Anthony Sanders, Distinguished Professor of Real Estate Finance, School of Management, George Mason University
- Vince Malta, Vice President and Liaison to Government Affairs, National Association of Realtors (NAR)
In a contentious hearing led by Chairman Barney Frank (D-MA), Republican members continuously pushed Treasury Secretary Geithner for a plan on how to end government control of Fannie Mae and Freddie Mac and account for the costs of their conservatorship in the budget, Ranking Member Spencer Bachus (R-AL) stated near the start of the hearing that "it's unacceptable … that the Treasury Department does not have a plan for Fannie and Freddie." Rep. Bill Posey (R-FL) was particularly forceful in demanding a plan from the administration, stating "We can’t wait forever to find out." While Secretary Geithner conceded that it was not feasible for the federal government to retain control of Freddie and Fannie indefinitely, he also cautioned that moving too quickly could undermine the economic recovery. "There are a lot of challenges ahead … [and we have to be] very careful that we're still helping to facilitate this process of recovery while we transition." He explained that "as we move forward, it is critical we facilitate a smooth transition to any new system. And I want to be clear: Treasury remains committed to supporting the continued activities of the GSEs in conservatorship."
With respect to GSE reform, Secretary Geithner acknowledged that "the form of the housing finance system will change," but maintained that "government has a key role to play in shaping the future of the nation’s housing finance system and in setting housing policy goals." He said that any "new system must be designed to ensure that markets are more stable, consumers are protected, sustainable credit is widely accessible and important housing policies, such as affordable housing for low and moderate income families, are administered effectively and efficiently." Mr. Geithner continued by asserting that "Government has a key role to play in that new system, but its role, and the role of the GSEs in particular, will be fundamentally different from the role played in the past." Among other items, "private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained." Geithner promised that the administration would begin formulating a plan to address Fannie Mae and Freddie Mac. He also announced that Treasury and the Department of Housing and Urban Development will submit a list of questions for public comment by April 15 related to the reform of the housing finance system and housing policy.
The second panel, consisting of housing experts, generally supported some form of continued government support for the housing industry. Ms. Wartell echoed Secretary Geithner's call for a measured approach to reform, stating "The current situation, in which the federal government, through FHA, Ginnie Mae or the GSEs, backstops almost 90 percent of the market for home mortgages, is not desirable or sustainable. No one seeks to preserve the government’s expanded role one moment longer than necessary. But there could yet be severe consequences from acting too precipitously to disrupt the unfortunate status quo."
Mr. Berman argued for an explicit government guarantee on mortgage-backed securities funded through risk-based fees. He argued that "the government’s guarantee should be at the security-level, not the enterprise-level. The existing system extended an implied federal backing to all the activities of Fannie Mae and Freddie Mac, including not only their mortgage guarantees, but also their portfolio investments, derivative counterparties and corporate bondholders." According to Mr. Berman, "While we believe it is essential for a portion of the market to have a government guarantee to retain liquidity, it is also essential that private capital be at risk to ensure that lending is efficient, effective and responsive to market conditions."
Mr. Calambria advocated breaking up Fannie and Freddie into "about a dozen" different entities, applying current Securities Act and Securities Exchange Act requirements to securities issued by GSEs, barring foreign central banks from holding GSE debt in order to prevent foreign policy factors from clouding economic policy, and requiring regulators to treat banks' GSE holdings as non-governmental corporate debt. Mr. Calambria noted "While Fannie and Freddie were rescued for a variety of reasons, prominent among those is that fact that their securities, both equity and debt, permeate our financial system. … The financial crisis resulted from the fact that so much of the soundness of our financial system is build upon the sand of house prices."
Mr. O'Donnell argued for incorporating community concerns, noting "A loan that does not work for consumers and communities ultimately will not work for lenders and investors, or for the financial system and the economy." He proposed two guiding principles for reform: "(1) the housing finance system should be integrated in several dimensions, and (2) private institutions that receive public benefits should also help to address public objectives." Ms. Bowdler argued that the private market will not serve low income, minority, elderly or immigrant borrows and therefore it is necessary that the federal government fill this gap. Mr. Dewitt argued for a more balanced policy that "doesn’t measure success solely by how much homeownership there is" and that offers renting as an attractive alternative. He noted "Apartments help create stronger and healthier communities by offering enough housing for the workers that businesses need, by reducing the cost of providing public services like water, sewer and roads and by creating vibrant live/work/play neighborhoods."
Mr. Sanders recommended reducing the GSEs' role in housing by "1) removing their affordability housing mission, 2) unwinding the retained portfolios at an accelerated pace and 3) toughening the regulatory oversight of Fannie and Freddie by moving it to a stronger FHFA." In addition, Mr. Sanders advocated requiring 10-20% down payments. When pressed on this point by Chairman Frank, Mr. Sanders said Congress should mandate that lending institutions require a 20% down payment, or 10% for FHA programs. Mr. Sanders also recommended passing legislation for a covered bonds market which could "potentially provide an excellent vehicle to fund the residential and commercial mortgage markets going forward." Mr. Malta agreed, noting "One tool that has captured the attention of NAR's members is covered bonds. Though an underutilized tool in our current secondary mortgage market arsenal, covered bonds are a product that should be further explored because of the added security these financial vehicles offer to potential investors." Mr. Malta also recommended that "Fannie Mae and Freddie Mac should be converted into government-chartered, non-shareholder owned authorities that are subject to tighter regulations on product, profitability, and minimal retained portfolio practices in a way that ensures the protection of taxpayer monies."