tv [untitled] CSPAN June 7, 2009 5:00am-5:30am EDT
fannie may and freddie mac played a leading roll in adding to the fire that burned down our financial system and our economy as a whole. they really abused the governmental advantage to the taxpayer and ran up a bill to the taxpayer. when the housing and economic recovery plan scored the bill as $25 billion and said there was less than a 50% chance that a bailout authority would ever be used and less than a 5% chance that the cost would run over $500 billion. he said the most inflamenttri arithmetic i've ever heard. the higher cost estimates
estimated, these numbers thrown out are inaccurate and misleading. the c.b.o. recently updated their scores and the costs have increased by over 1,500%. so we begin this month with a more formal debate with providing the government with a more explicit authority i think it is important any discussion begins and ends with g.s.e.'s and any reform that does not include g.s.e.'s are not true reform. fanny and freddie are a large part of the problem and reforming them should be a lart part of the solution. i'm worried that a so-called stemic -- systemic risk regulator we could establish a dozen new fanny and freddies that will be too big to fail.
as our member from alabama points out, this will be privatizing profits and socializing risks. we should learn from our past mistakes and not repeat them. going forward, i think it is important we have a viable market to provide additional funding so people can experience the american dream of owning their own homes. one tool are recovered bonds. recovered bonds are debt instruments backed by collatera lized pool of mortgages. they also continue to have a full recourse on the institution in case there is a failure. this is widely used in europe to provide liquidity there, and i think we can do it here. i want to thank chairman frank who said he would hold a hearing on this important topic, and i look forward to working with him and all my colleagues as we continue to work on this.
i want to also thank the witnesses coming forward. thank you. >> we will now here from mr. scott. >> thank you, mr. chairman. i want to thank the chairman for holding this important hearing concerning fannie may and freddie mac. this continues to be of utmost concern to our economy. the collapse of these two mortgage giants had a profound impact on our whole economy. i want to hear more about the risk of a prolonged economic slump and how long the g.o.p.'s plan to proceed in the future as well as their current conserve toreship situation. i am further interested in hearing what the federal housing agency has to say about the future of s.c.e.'s, and what this agency believes they should or will look like down the line,
especially as mortgage markets continue to face turmoil. there are many 80's and proposals regarding the direction in which g.s.e.'s should take from making them a government entity or absorbing them into another government entity, such as the f.h.a., to splitting them up into multiple g.s.e.'s to privatization, and simply eliminating all implicit and explicit government backing for mortgage-related instruments. the fanny and freddie fallout not only affected the economy, it affected main street as well. many of our nation's community banks have been hard hit. they have held some 85% of lenders that held fanny and freddie stock. our community banks are the back bone of communities across this country. this is especially true in my
state of georgia where we are experiencing a large number of bank closures. this situation is helping to reduce bank scomplal impede bon the ability of banks to make new loans. i want to make one mention of one particular situation that as a result has raised big questions. resulted to raise big questions. when freddie mac ignored the two leading rating agencies, moodies and standards and poors on rating the markets in securitization of nine months and relying on the markets of smaller agencies, the french and dominion rating bonds, and that $1 million deal led to aaa ratings and s&p said that freddie and fannie lost the rating method considered to be too rigorous.
so the question and answer that has to be dealt with today, is it not 2 role of the agencies to be more vigilant in the rating process after being chastised by congress and the media of handling of aaa ratings on the complex securities that began to falter when home buyers could no longer pay their mortgages. the flip side of that, of course, are the big credit rating agencies maybe making some of the institutions jump through hoops that are not necessary. serious questions and a very timely hearing. i look forward to hearing from our witnesses. thank you, mr. chairman. >> thank you very much, mr. scott. i will hear from mr. walker for three minutes. >> thank you, mr. chairman. i appreciate your convening this hearing. congress established fannie mae during the new deal to make homeownership more affordable and they created freddie mac with a similar purpose in 1970.
neither provides home loans. instead, their purpose is to increase the funding available for home mortgage financing either by providing credit guarantees on mortgage-backed securities or by directly investing in mortgages and mortgage-related securities through their retained mortgage portfolios. to further the missions, the gses congressional charters granted them unique privileges, shielding them from many of the financial standards and tax burdens imposed upon their competitors. these benefits created a perception that fannie and freddie were backed by the u.s. government, and this implicit guarantee also provided them a funding advantage over private sector participants. not surprisingly over time the gses advantages enabled them to dominate the secondary mortgage market. today, they have more than $5.5
trillion in outstanding obligations, an amount that is almost 40% of the size of the entire u.s. economy. the systemic risk posed by the size of these entities was only magnified by tin ves or the perceptions that they were backed by the full faith and credit of the u.s. government. in september, those perceptions became reality. on september 7th, 2008 shortly after congress passed the gse regulatory reform legislation, the federal government placed fannie and freddie into conservatorship. the rescue was one of the most extraordinary federal interventions into the private sector and is on track to become one of the most expensive if not this most expensive. as part of the gses conservatorship agreement, treasury committed up to $200
billion to purchase preferred stock from each company through december 31, 2009. in exchange, freddie and fannie provided the treasury with $1 billion in senior preferred stock and warrants to acquire 80% of each gses. in addition, the treasury purchases the preferred stock, and both the treasury and the fed also schedule, are also scheduled to purchase trillions of dollars worth of gse debt and mortgage-backed securities as of may 29th, treasury has purchased $167 billion of gse ombs under the authority act of 2008. and the cbo estimates in march that the gse's title of perk will cost $384 billion. the fed currently holds $81 billion of gse debt and $507
billion of agency mbs. on march 18th, the fed announced its purchase of agency mbss will total $5 billion by the end of the year. also they have issued a credit facility for both gses to provide liquidity. mr. chairman, in conclusion, the magnitude of the gse bailout demands the full engagement of the future of the gses and congress must work to develop a new model for housing finance. some like treasury secretary hank paulson or former secretary paulson have endorsed a public utility model. others, myself included, have proposed shrinking and privateizing the gses. whatever the gse's ultimate fate, we can all agree that the gses cannot continue before, and socializing risk and privatizing
profit and as mr. garrett said must end. the american people demand a end to the bailout and any discussion of the long term bailout to the gses must include a exit strategy for the gses. i look forward to the witnesses today and the hearing and their ideas for a transition period for the gses. i yield back the balance of my time. >> thank you very much. we will recognize the gentleman from illinois, mr. foster for two minutes. >> i would like to follow up on ranking member garrett's interest in covered bonds. i think that we should all show some humility in the current situation and look laterally of countries that have systems that did not get into this mess and in particular the american enterprise institute has had meetings and presentations on converting the gse-based system and mortgage-backed system to
covered bonds known as the danish system which i think has tremendous potential. it has provided an efficient and liquid model for housing finance since the great fire of 1795 in copenhagen and survived numerous booms and busts, and i can't see what is wrong with it. there is a fairly worked out scenario in the presentations for actually transitioning fannie and freddie into the system. i'd be very interested in pursuing this if not in this hearing, but subsequent hearing and other conversations. thanks very much. i yield back. >> thank you, mr. foster. now we will hear from the gentleman from delaware, mr. castle. >> thank you, mr. chairman, and mr. garrett for holding the hearings. i believe that the future of fannie mae and freddie mac are of tremendous interest because they hold a big part of the housing market. we cannot negligent other parts of the housing markets. while gse is important, we have to consider other housing
finance and their role coming forward. the events of last summer have led many to believe that the private/public model enterprise is flawed. but does this make the government take unnecessary risk because they realize they will be provided a lifeline if things go bad? or does this apply to all private/public partnerships even though they have worked well? perhaps it is not the model at fault, but perhaps some of the facts adopted by the gses themselves that are indeed i need of reform. so the question is raised, what do we do with fannie and freddie? should they refurn to gse status? after we have exhausted the conservatorship role or should we privatize them and eliminate the government backing role altogether? i am looking forward to the testimony of the panel before us to hash out the issue. i hope that the experts before us today will be able to address the future of the housing and mortgage market in general as
now, we have 6 trillion, and we basically allowed a government enterprise to borrow at a much lower rate than their competitors could. we allowed them to form a situation in which they could arbitrage and in which they could build up a portfolio of $1.5 trillion. then were forced to be in subprime and alt-a loans. when we called attention to this, we were told, there is no risk, or we're going to roll the dice on this risk. well, the consequences have been not only to drive up a balloon in the housing market, but with the collapse to lose billions of dollars for stockholders. more importantly, to lose that money for those who were involved in the housing market and the side-effect that this has had on housing prices in the u.s.
effect that this has had in housing prices in the u.s. so the observation i would make first is that i would get a hold of any member interested in the debate and i would get a hold of a new book called "the housing boom and bust" and see the role that congress played in helping to create this crisis. second, i'd think long and hard in the future about creating political manipulation into market. we should be the regulators and we should not be tying the hands of the regulator. in '89 we had from freddie mac, the chairman of the organization come up here and say, it would risk safety and soundness to allow these kinds of portfolios to develop, and instead, we allowed 101 to 1. 101 to 1 leverage out of the institutions and the resulting collapse and systemic risk, and we ignored the regulators who tried to warn us and we tied the hands of the regulators today. that is debate we should be having today and learn a lesson from it.
>> thank you, mr. royce. we will now hear from the gentle lady. >> thank you, mr. castle, i thank you for holding this hearing today. as i hope this is the first of a series of discussions on the future of the gses and freddie and fannie. as you know, we were all wanting to know whether it was explicit or implicit was resolved last fall due to overabundance of risk in the portfolios and fannie and freddie put into the federal conservatorship. since then, they have set up two gses to control the day-to-day operations, but in tight control over the other operations. i want to hear the director of fasa -- did i get that right? on the current status of the gses and the role they continue the play in the mortgage markets and the current entities. the current situation is not ideal and i want to return the gses to the private markets as quickly as possible.
what shape or form this will take is unknown at this time, but it is clear that the business model was not foreseeable as it allowed the gses to take on too much risk and have the taxpayers step in when the losses were too great. there is too much loss out, there and our witnesses will elaborate on them. one thing that does concern me from my constituents is the fact that the market fees on the gses is having adverse realities for my home buyers and putting them out of the market. i look forward to hearing the director speak of the genesis of the fees and the liquidity of the mortgage markets and i look rward to hearing from all of the witnesses today and i thank the chairman for holding the hearing. i yield back. >> thank you very much. and now, we will hear from the gentleman from florida, mr. kline for three minutes. >> thank you, mr. chairman, for holding this hearing and the ranking mb as well.
the current downturn showed the weaknesses in fannie and freddie and it is important to determine the proper structure and goal going forward, but it is equally important to know that faha is doing everything stable to prevent foreclosures. i am concerned about the housing markets where i come from in south florida, particularly because of the lack of the quantity of staff of freddie and fannie servicing florida. i have heard from loan modification officers and other people in my district who are ready to help fanny with the caseload of foreclosures and the modifications and refinancing, but they are having trouble being approved by fannie and freddie because of the red tape. but my point is that foreclosures are going forward because we do not have the adequate staff. and we know that is unacceptable for foreclosures because there
is not proper staff to do the home modifications. we have had some conversations and we recommend and ask that as we work through the difficult time period we have the staff and support to get the modifications working through the process. i look forward to the comments and the working with the members and representatives to accomplish this. thank you, mr. chairman. >> thank you mr. klein. and now we will hear from the gentleman from texas. >> thank you, mr. chairman, as a perspective from a member of this committee and a member of the oversight committee and the t.a.r.p. program, there are but four causes of the economic recession, and none loom larger than the monopoly powers granted to fannie and freddie coupled with the so-called affordable housing mission that essentially mandated that they loan money to people to buy homes that ultimately they could not afford to stay in. many of them have said though that under hr-1427 passed in may
of '07 that somehow this situation has been rect ffied. since that legislation, the conforming loans have increased to $729,000 increasing the taxpayer liability, and the increasing portfolios of the gses have been increased and more taxpayer exposure and the shares of mortgages have increased which increases taxpayer exposure, and now taxpayers are forced to invest $87 billion for the preferred stock provisions and exposed to up to $8 billion for those agreements. and it is estimated to have a cost of $384 billion at a time when americans are struggling to pay their taxes and keep their jobs. i'm glad, mr. chairman, that you are holding this hearing. certainly since hr-1487 has
taken care of the worst of fannie and freddie, we need the conservatorship to have a time certain time to end, and transition these back to the private market and get the hand of government out of this enterprise that has caused this taxpayer debacle for generations to come. thank you. i yield back the balance of my time. >> thank you very much. now, we will hear from the second gentleman from texas, mr. kn neugenbauer. >> thank you. i believe that the task for this committee and the commissioner and his team is to number one, stop the bleeding. as obviously, you will testify that the american taxpayers had to put an extremely large amount of money into the entity and may have to put more, but as we go down the road, how do we keep
this from happening again? obviously, we want to take steps to prevent being in this position again. and also to, develop a exit strategy to protect the money that the american taxpayers have already invested in the entities. fourthly, while we are doing all of this, we have tohave to ensue is no more disruptions in housing finance in this country. if we don't have a way to transition to a housing finance source that will take up the slack, because what we are going to see is testimony that basically the only game in town now is fddie and fannie and fha. if we do not have entities in place to take up the slack, we will cause another major disruption in the housing market in a time when the american families have already lost a substantial part of their equity. we don't need to be in a situation to create that. so it is easy to identify the problems that need to be
addressed. obviously, many people have reasons how we got here, but more importantly, the important questions are where do we go from here? i look forward to hearing from the witnesses today as to where do we go from here? thank you. i yield back. >> thank you very much, mr. neugartenbauer. >> your testimony will become part of the written record. today, we will have a presentation on behalf of the agency and also joining him at the table are two of the deputies mr. edward dimarco, chief operating officer and senior deputy director for housing mission and goals and mr. christopher dickinson, deputy director for enterprise regulation. these two individuals have the responsibility for regulating fannie mae and freddie mac. mr. lockhart, you are recognized
for such time as you may consume to make your remarks. >> thank you, mr. chairman. chairman con jurs ski and ranking member garrett and other committee members, thank you for inviting know speak today about fannie mae and freddie mac, the future and federal involvement in the housing and finance system. with almost $12 trillion in outstanding mortgage debt, housing finance is critical to the u.s. economy. as the conservator, fhfa's goal is to preserve the fannie and freddie. as the regulator, our mission is to ensure that the enterprise provides liquidity, stability, and forgeability to the market a sound manner. that is a statutory responsibility as it is the public purpose that congress gave the enterprises. the enterprises own or guarantee 56% of the single-family
mortgages in the country for a total of $5.4 trillion. given that massive exposure, the best way to preserve the assets and fulfill the mission is to stabilize the mortgage market and strengthen the safety and soundness. working with the federal reserve and the bush and the obama administrations and other regulators, that is our top priority since the conservatorship began and will continue to be so. supporting mortgage modifications and refinancings for homeowners into safer mortgages are an important element of stabilizing the housing market and thereby the u.s. economy. the form in which fannie mae and freddie mac exited from conservatorship once the houghing market is stabilize should be addressed by congress and the administration and i think that this is a great first step to have this hearing. fhfa continues to classify fannie and freddie as critical supervisory concerns. as there were significant risks
they would be unable to fulfill their missions we placed them in conservatorship last september, and since then the treasury department has purchased $86 million in the senior preferred stock. the enterprise's short term financial outlook remains poor. which will result in additional requests for preferred stock investment from the treasury department. however, both enterprises have stress tested their shortfall or capital treasury and asked to fund $200 billion in capital for each of them to be sufficient. the senior preferred stock purchase agreements have given investors confidence that there is an effective guarantee of the gses' obligations. in addition, the combined financial support of the treasury department and the federal reserve of over $750 trillion to date have ensured they will remain liquid. because of this support, both
enterprises have been able to maintain a critically important presence in the secondary mortgage market. their combined share of mortgage origination in the first quarter of 2009 and also in 2008 was 73% which was double the 37% in 2006. while the enterprises continue to support the secondary market, new senior management teams have worked with fhfa to develop remediation. they have made progress, but they face numerous challenges to the operations. the staffs of the enterprises and fhfa have been working hard to strengthen the safety and soundness. in the current mortgage crisis, the enterprises have focuseded on mortgage availability, mortgage affordability and foreclosure prevention. modifications taken for their own book of business are critical for eliminating their own credit losses and more