[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
SUSTAINABLE HOUSING FINANCE:
AN UPDATE FROM THE FEDERAL
HOUSING FINANCE AGENCY ON
THE GSE CONSERVATORSHIPS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-8
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
March 19, 2013............................................... 1
Appendix:
March 19, 2013............................................... 53
WITNESSES
Tuesday, March 19, 2013
DeMarco, Edward J., Acting Director, Federal Housing Finance
Agency (FHFA).................................................. 9
APPENDIX
Prepared statements:
DeMarco, Edward J............................................ 54
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Written statement of the National Multi Housing Council
(NMHC) and the National Apartment Association (NAA)........ 70
Maloney, Hon. Carolyn:
Letter to the Federal Housing Finance Agency from the New
York congressional delegation, dated November 7, 2012...... 90
Waters, Hon. Maxine:
Written statement of Empowering and Strengthening Ohio's
People (ESOP).............................................. 93
DeMarco, Edward J.:
Written responses to questions submitted by Representative
Ellison.................................................... 96
Written responses to questions submitted by Representative
Royce...................................................... 106
SUSTAINABLE HOUSING FINANCE:
AN UPDATE FROM THE FEDERAL
HOUSING FINANCE AGENCY ON
THE GSE CONSERVATORSHIPS
----------
Tuesday, March 19, 2013
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Miller, Royce,
Capito, Garrett, Neugebauer, McHenry, Campbell, Bachmann,
Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hurt,
Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren,
Pittenger, Wagner, Barr, Cotton; Waters, Maloney, Velazquez,
Watt, Sherman, Meeks, Capuano, Scott, Green, Cleaver, Ellison,
Perlmutter, Himes, Peters, Carney, Foster, Kildee, Murphy,
Delaney, Sinema, Beatty, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
The Chair now recognizes himself for 2 minutes for an
opening statement.
I would like to start off by quoting from our witness'
testimony: ``Few of us could have imagined in 2008 that we
would be approaching the fifth anniversary of the placing of
Fannie Mae and Freddie Mac in conservatorship and have made
little meaningful progress to bring those government
conservatorships to an end.''
I could not agree more and that is why I am determined that
today's hearing will be a truly historic one. I am determined
that this hearing will be the last time that Director DeMarco--
or, if you believe press reports, his successor--will testify
before this committee before we finally and belatedly mark up a
true Government-Sponsored Enterprises (GSE) reform legislation.
I define this as legislation to one, once and for all
abolish Fannie Mae and Freddie Mac as Government-Sponsored
Enterprises; and two, create a truly sustainable housing
policy--sustainable for our economy, sustainable for those
seeking the goal of homeownership, and sustainable for hard-
working taxpayers who should never, ever be called upon again
to bail out Wall Street.
Now, I know this is a heavy lift, especially in divided
government, and that is why the leadership of this
Administration is so critical. Regrettably, they have not
released a reform plan; instead, over 2 years ago they issued a
White Paper of options and simply let it gather dust. The
interested public has long since deleted the PDF file from
their hard drives.
After 4\1/2\ years, inaction is no longer an option,
because the GSEs were at the epicenter of the financial crisis.
They were part of a tragically misguided government policy to
incentivize, browbeat, and mandate financial institutions to
loan money to individuals to buy homes they could not afford to
keep.
Consequently, millions saw the American dream turn into an
American nightmare. Millions more were forced to contribute to
what has proven to be the mother of all taxpayer bailouts. And
shamefully, instead of being reformed, Washington continues to
functionally grant them a monopoly.
So, part of today's hearing will focus upon what the
Federal Housing Finance Agency (FHFA) is currently doing to
reduce the size and influence of the GSEs and how to accelerate
that process with the goal of repealing their government
charters in the foreseeable future and help lead us towards a
truly sustainable housing finance system.
I will now yield 4 minutes to Ranking Member Waters for her
opening statement.
Ms. Waters. Thank you, Mr. Chairman, for holding this
hearing today on oversight of the Federal Housing Finance
Agency.
We are at a pivotal moment in our housing recovery, having
staunched the bleeding caused by the 2008 financial crisis
after large declines in home prices in 2007 through 2011.
Prices in many markets bottomed out in early 2012 and are now
starting to rise.
Housing construction is likewise increasing and a record
1.1 million households were able to refinance under HARP in the
last year. Freddie Mac posted $11 billion in income in 2012,
and Fannie Mae expects to report significant net income when
they file their annual report.
But headwinds remain in the market, with many homeowners
still struggling to negotiate loan modification, refinance
their mortgages, and understand the terms of the many mortgage
settlements that have been negotiated. Principal reduction
modifications also, unfortunately, remain rare, and the private
sector continues to be largely unwilling to offer mortgage
credit even to qualified borrowers due to investor skittishness
over lingering problems in the private securitization market.
Acting Director DeMarco, who is here to testify before us
today, finds himself at the center of this tremendously complex
and important market as the conservator of Fannie Mae and
Freddie Mac.
I appreciate that this is a tough job and that it is not
easy serving in an acting capacity for nearly 4 years. But
having said that, I am concerned that Mr. DeMarco has used his
wide latitude in regulating Fannie Mae and Freddie Mac to make
a number of controversial decisions during his tenure,
including refusing to move forward with principal reduction
modifications even when they would benefit the taxpayer, and
raising fees in States with strong consumer protection laws.
While I have agreed with some of Mr. DeMarco's decisions, I
am concerned about this lack of accountability, particularly
since many of the choices being made will impact the future of
the secondary mortgage market. I have been urging my colleagues
to begin the work of reforming the GSEs because without action
from this committee, Acting Director DeMarco will have to
continue to take it upon himself to do the work of reshaping
Fannie Mae and Freddie Mac outside of public scrutiny and
without the input of the Congress of the United States.
This committee should begin the job of considering the many
bipartisan reform proposals on the table so that we can give
the market certainty; guarantee the continued availability of
the stable mortgage products like the 30-year fixed-rate loan;
and ensure that institutions of all sizes, including community
banks and credit unions, are able to participate in the
secondary mortgage market.
Moreover, I implore my colleagues in the Senate to support
the next nominee selected by the President to head the FHFA.
Finally, as we consider the testimony today, let us
remember that the issues we are discussing reach beyond
specific policies regarding the GSEs. Our purpose is not only
to put the GSEs on solid footing but to create the conditions
that will help bring our economy back to full strength.
Mr. Chairman, I hope this is the priority of the committee
going forward. Republicans are in charge. We have not seen a
proposal come forward.
I would hope that this committee, under your leadership,
would provide the leadership that is necessary to reform the
GSEs. We know of your longstanding concern, and the criticism
that you have launched constantly about the GSEs, so I am
hopeful that you will be in charge of reform for us.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, for 1\1/2\ minutes.
Mr. Garrett. Thank you, again, Mr. Chairman, for holding
this important hearing.
And I would like just to start off, before my comments, by
thanking Director DeMarco and also the entire team for all of
their hard work during what have 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 the American homeowner, as well. And
he does so against tremendous pressure from those who would
like to look at these Enterprises as their own piggybanks, if
you will.
It is 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 on
this committee can agree, I think, that having over 90 percent
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 now, with $16 trillion
in debt and annual $1 trillion deficits, we really cannot
afford to continue keeping $11 trillion of mortgage credit on
the back of the taxpayer.
I would also note that these steps taken by the Director
are far more than any reforms that 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.
So finally, thankfully, it does not appear that the
Director feels this way. I thank him for his thoughtful work,
and I look forward to working with him and also the members of
this committee to pursue this process of reform.
Thank you.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Mrs. Maloney, for 3 minutes.
Mrs. Maloney. Thank you, Mr. Chairman, for calling the
meeting.
And welcome, Mr. DeMarco.
It has been 4 years since the GSEs went into
conservatorship and we all know how important housing is to our
economy. Some economists estimate that housing and its related
industries are a roaring 25 percent of our economy. Until we
straighten out housing, our broader economy will not fully
recover.
So this is a tremendously important issue to all of us. I
applaud the bipartisan efforts on this committee with Mr.
Campbell and Mr. Peters, and Mr. Miller and Mrs. McCarthy, and
I hope we will have hearings to focus on their related ideas.
I look forward to hearing more today about your three-part
strategic plan to build, maintain, and contract the GSEs. I
believe your efforts for a single platform and standardized
practices is a great step forward, a great development.
And I also believe that your efforts to maintain
foreclosure prevention activities and credit availability and
to refinance mortgages has been successful. I also want to
applaud the work with the Home Affordable Refinance Program
(HARP) to promote foreclosure prevention activities, which has
had some successes: 1.1 million refinances have been done,
which nearly equals the number of HARP refinances over the
prior 3 years. That is a success.
And the focus of your office on underwater mortgages with
those with greater than 105 loan-to-value ratios--these
refinances represent 43 percent of the total HARP refinances in
2012 compared to 15 in 2011. So that is a movement in the right
direction but we can still do more.
It is in the area of contracting that I have the most
questions, including the effect that it will have on multi-
family housing and single-family housing. The GSE multi-family
housing portfolio picks up pieces of the housing sector that
the private sector has not been interested in. They usually are
not interested in providing affordable housing.
So I have questions about the effect that it will have on
the policy goal of affordable housing, which I deeply support,
and the 30-year mortgage.
I also have questions about what contracting will mean in
terms of the guaranteed fees on States that have longer
foreclosure times but better outcomes in terms of rates of
foreclosures. These States are keeping people in their homes.
Shouldn't we be looking at the result and rewarding States or
localities that keep people in their homes as opposed to
raising their fees?
I look forward to your testimony.
Thank you. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Miller, for 1 minute.
Mr. Miller. Thank you, Mr. Chairman.
Because of securitization technology, the secondary market
of mortgage investors developed into a deep global market that
generally worked well to the advantage of the average American.
But the hybrid public-private model of Freddie and Fannie was
fundamentally flawed. They acted as private companies with
public policy charters, serving two masters.
What we replace them with must capture the important
function they historically performed. We still need a viable
secondary mortgage market with sound underwriting principles.
I introduced a bill last year to eliminate Freddie and
Fannie, saying that we need to look to a secondary market for
residential mortgages and focus on that. I proposed a system
separate from the government, eliminating the conflict inherent
in a model where the private sector benefitted from the
government guarantee, meaning government risk, private sector
rewards.
Make sure the secondary market was the privately financed
capital we use was not government funds. Don't cap the maximum
volume of purchases and sales, crowding out the private sector
was not a part of the bill, it was the primary portion of it.
Historically, housing led to recovery in this country. It
has to this time. We need an alternative to Freddie and Fannie
and we need it rapidly.
Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Sherman, for 1\1/2\ minutes.
Mr. Sherman. In the 1930s, we tried the idea of no Federal
role in home finance. It did not work out.
Then we tried this GSE model, where organizations run by
those rewarded for profits had a full, implicit Federal
guarantee. They took risks to benefit their shareholders and
the taxpayers were left holding the bag. So that is not
something we should return to.
And I will agree with the chairman if that is as far as he
goes.
But I do think we need a Federal agency, or more than one
involved in the market, otherwise we will see the end of the
30-year mortgage with fixed rates available to average middle-
class families. What percentage of the market this government
agency or agencies should control or be involved in is a
subject I look forward to discussing in this room.
We all want to help those homeowners who are in trouble or
underwater, but we should recognize that many of the ways we
help actually cost the Federal Government money, or should I
say reduce the value of instruments held or, in effect,
guaranteed by the Federal Government. I want to commend the
GSEs for their help in allowing homeowners to refinance even if
they are underwater since that usually doesn't cost the Federal
Government any money.
What it does cost are those investors who are reaping 5 and
6 and 7 percent yields on government-guaranteed paper. So I
commend you for that effort, and I look forward to hearing
about more.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Royce, for 1 minute.
Mr. Royce. Thank you, Mr. Chairman.
I want to thank Director DeMarco again for being with us
here today.
And I wanted to also share with the committee that I think
the Director has taken some bold, courageous steps as both a
regulator and a conservator of the GSEs, but I would have to
say, the same cannot be said of the Administration.
Secretaries Geithner and Donovan promised long-term plans,
and we have been given only options. We had a failure of the
financial markets, we got a White Paper; we had a failure of
the housing finance system, we got a White Paper. A White Paper
with a choose-your-own-adventure response is not what Congress
needs and it is not what our markets need.
We need to restore the appropriate role of the private
sector in housing finance. We need serious leadership to move
us away from a system overly reliant on taxpayers toward a
free-functioning market which accurately prices risk.
Thank you. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Green, for 1 minute.
Mr. Green. Thank you, Mr. Chairman.
Welcome, Mr. DeMarco. There is a role for the private
sector. There is also a role for the public sector.
I talk to the builders; they believe that there is a role
for the public sector. I talk to the REALTORS; they believe
there is a role for the public sector. I talk to the bankers;
they believe there is a role for the public sector. And my
constituents who want 30-year loans understand that there is a
role for the public sector.
The question is not really whether there is a role, but
whether we will take the time to fashion and craft a meaningful
piece of legislation without anybody's recommendation so that
we may have the role codified into the law.
I do regret that we have not codified this into the law,
but I don't blame the Administration. There are 435 Members of
Congress. Any one of us can craft our own legislation.
I believe that those who have said that we should have done
it in when we were in charge, ought to do it now that they are
in charge.
I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, Mrs. Capito, for 1 minute.
Mrs. Capito. Thank you.
And welcome, Director DeMarco, to our committee.
I want to thank the chairman for holding the hearing and
also for his efforts to center the discussion on housing
finance as we look forward to, hopefully, structural and
significant reforms.
As has been said many times here, we have 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 is
our housing finance system.
The objectives that led Fannie and Freddie to assume such
considerable risk in size and the market ultimately led to a
taxpayers' bailout, a rescue by the taxpayer.
So it is 4 years later and it is unacceptable that we have
not reformed and made a business model available for housing
finance. To date, 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.
Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Neugebauer, for 1\1/2\ minutes.
Mr. Neugebauer. Thank you, Mr. Chairman, for holding this
important hearing today.
And I also want to thank Mr. DeMarco for his service and
for being here this morning.
As we approach the 5-year anniversary of Freddie and Fannie
we realize 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 housing
finance not only creates moral hazard but it also creates
political pressure for increasingly risky lending practices.
We learned that the government guarantees mortgage debt
eliminates essential market discipline in the risk aversion for
investors, and we 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 have 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 have not put forth 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 is really time for Congress and for the Administration
to just 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.
I look forward to your testimony, Mr. DeMarco. And thanks
again for your service.
Chairman Hensarling. The Chair now recognizes the
gentlelady from Minnesota, Mrs. Bachmann, for 1 minute.
Mrs. Bachmann. Mr. Chairman, thank you.
And I thank our witness, as well.
One thing we have learned about the GSE policies is that
millions of Americans have been victims of these policies. They
have lost, collectively, billions of dollars worth of assets.
The people who have suffered more than any are those at the
bottom end of the economic scale, particularly the African-
American community. They have suffered from these policies.
And when, as Mr. Neugebauer said, we see that over 90
percent of the mortgages have a nexus to government involvement
this doesn't even pass the falling-off-the-chair-laughing test
to think that somehow this is a public-private partnership. It
is not. This is the Federal Government. It has been a failure.
When are we going to realize that government has been a
very lousy steward of people's money? And also, we have, at the
same time, disadvantaged a lot of people with a lot of well-
meaning programs.
What we need to do is pay back the taxpayers who funded
this bailout, get them out of guaranteeing the GSEs, and change
our standards.
Thank you, and I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from Missouri, Mrs. Wagner, for 1 minute.
Mrs. Wagner. Thank you, Mr. Chairman.
As we continue this debate over housing finance reform, I
am keeping three very basic thoughts in mind. The first is that
the current situation, as has been brought up previously, with
the taxpayers backing over 90 percent of the new mortgages, is
both unacceptable and untenable. We have, of course, arrived
here due to a history of flawed government policies that
continue to pose a direct threat to homeowners and taxpayers.
The second thought is that the GSE model has to go, but in
order for that to happen, Congress and the FHFA must work to
establish market guidelines that provide transparency and legal
certainty for private investors. This will encourage private
capital finance to finance mortgages just as it finances
virtually every other credit market in the United States.
Third, I believe that if we can establish those rules and
guidelines, we will see private capital enter the mortgage
market in a large way, moving us away from mistakes of the past
and protecting families and taxpayers in the process.
With this in mind, I look forward to hearing the testimony
of Mr. DeMarco.
Thanks.
Chairman Hensarling. We now welcome Ed DeMarco as our sole
witness today. In 2009, President Obama designated Mr. DeMarco
to be the acting Director of the Federal Housing Finance
Agency, which is the regulator of Fannie Mae, Freddie Mac, and
the 12 Federal Home Loan Banks.
Mr. DeMarco is a career civil servant, with over 20 years
of housing policy experience, including stints at GAO,
Treasury, and OFHEO. He holds both a B.A. and a Ph.D. in
economics.
Without objection, Mr. DeMarco's full written statement
will be made a part of the record. Members are advised that Mr.
DeMarco will be excused as our witness at 12:30 today.
Mr. DeMarco, welcome to our committee again, and you are
recognized for a summary of your testimony at this time.
STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, FEDERAL
HOUSING FINANCE AGENCY (FHFA)
Mr. DeMarco. Very good. Thank you, Mr. Chairman.
Chairman Hensarling, Ranking Member Waters, and members of
the committee, I am pleased to be here to testify before you.
As required, I submitted a detailed written statement to the
committee, and I look forward to engaging with you today as
there are many important topics to be discussed.
Fannie Mae and Freddie Mac, or the Enterprises, as I will
refer to them, have been in government conservatorship for more
than 4\1/2\ years. These lengthy conservatorships are
unprecedented and they were never intended to be a--
[Disturbance in hearing room.]
Chairman Hensarling. The committee will come to order. We
will give you one warning and then you will be cleared from the
room. Staff will get the Capitol Police.
The Rules of the House require all observers to maintain
order and decorum. Clause 2(k)(4) of Rule 11 provides that the
Chair will punish breaches of order and decorum by censure and
exclusion from the hearing.
I hereby direct the Capitol Police to remove the gentleman
causing the disturbance from the committee room.
All guests will be reminded that they are guests of the
committee. They will observe decorum at all times or they will
be escorted out of the room by the Capitol Police.
Mr. DeMarco, you are again recognized for a summary of your
testimony.
Mr. DeMarco. Thank you, Mr. Chairman.
And I do understand the pain that this housing crisis has
caused for so many families around the country and the
tremendous cost it has imposed upon the American taxpayer.
The first chapter of conservatorship focused on restoring
stability and liquidity to housing finance during the financial
crisis in the fall of 2008. We succeeded.
The second chapter focused on foreclosure prevention
efforts, which were critical to help borrowers in distress and
essential to meeting our conservatorship mandate to preserve
and conserve the Enterprises' assets. Efforts to minimize
losses on troubled mortgages have been good for borrowers, good
for communities, and good for taxpayers--
[Disturbance in hearing room.]
Chairman Hensarling. The Rules of the House require all
observers to maintain order and decorum. Clause 2(k)(4) of Rule
11 provides that the Chair may punish breaches of order and
decorum by censure and exclusion from the hearing.
Voice in audience. And I thought Barney Frank had retired.
Chairman Hensarling. The committee will come to order. The
committee will come to order.
Mr. DeMarco, you are once again recognized for a summary of
your testimony.
Mr. DeMarco. The next line in my prepared remarks is: The
task has not been easy. While we have not always succeeded, the
results are better than frequently recognized.
In conservatorship, the Enterprises have completed more
than 2.6 million foreclosure prevention transactions. Of these,
nearly 2.2 million of these transactions resulted in the
borrower staying in their home.
For borrowers able to pay their mortgage, the Enterprises
have refinanced almost 15 million mortgages since
conservatorship. More importantly, they have completed almost
2.2 million HARP refinances--
Chairman Hensarling. The witness will suspend.
I would ask staff to ask the Capitol Police to come in
again and escort these individuals outside of the hearing room.
Ladies and gentlemen, we are not going to allow you to
disturb this hearing as part--
Ms. Waters. Mr. Chairman?
Chairman Hensarling. --of the people's--
Ms. Waters. Mr. Chairman?
Chairman Hensarling. --House, and so--
Ms. Waters. Mr. Chairman?
Chairman Hensarling. --you will be excluded--
Ms. Waters. Mr. Chairman?
Chairman Hensarling. --at this time.
Ms. Waters. Mr. Chairman, can we just ask the people with
the signs to put them down rather than putting them out?
Chairman Hensarling. All guests have been warned. You will
not interfere with the proceedings of the people's House. The
Capitol Police is requested to escort all of these people out
of the room.
And I would say to the ranking member, they have been
warned not once but twice, and given every accommodation.
You will now be cleared from the room.
Again, Mr. DeMarco, you are recognized for your testimony.
We hope you can get more than a couple of sentences out.
Mr. DeMarco. More importantly, we have completed almost 2.2
million HARP refinances, which are targeted at borrowers with
little or no equity in their homes. While not without its
shortcomings, delays, and other problems, this collection of
programs remains a noteworthy response to an unprecedented
crisis, and the work to help borrowers continues.
Today, the tools and the processes are much better-
established than they were a few years ago. A big reason for
that is the dedicated work of employees at Fannie Mae and
Freddie Mac and my own team of hard-working civil servants at
FHFA.
While we continue to refine and improve these programs,
last year we began moving on to another chapter of
conservatorship. A year ago, I sent to this committee a
strategic plan for the Enterprise conservatorships.
That plan had three broad strategic goals. First, build.
Build a new infrastructure for the secondary mortgage market.
Second, contract. Gradually contract the Enterprises'
dominant presence in the marketplace while simplifying and
shrinking their operations.
And third, maintain. Maintain foreclosure prevention
activities and credit availability for new and refinanced
mortgages.
These goals satisfy our statutory mandate as conservator,
are consistent with the Administration's call for a gradual
wind-down of the Enterprises, and preserve all policy options
for Congress. Achieving these goals will produce a stronger
foundation on which Congress and market participants can build
to replace the pre-conservatorship GSE model.
Earlier this month, I announced specific steps I expect
Fannie Mae and Freddie Mac to take this year in pursuit of
these three goals. Briefly, we are building for the future by
establishing a platform for future mortgage-backed
securitization.
This platform, while owned by the Enterprises, will have
its own CEO and board and will operate away from either
company. Building this platform is an important element to
assisting Congress with a transition from the old model to a
new one.
We are contracting the Enterprises by setting targets to
gradually shrink each of their three business lines this year.
And lastly, we are continuing efforts to maintain market
stability and liquidity. Areas of focus this year include: reps
and warrants; mortgage insurance; and force placed insurance.
In closing, the members of this committee have important
choices to make--choices that will define the role of the
government in the housing finance system for years to come.
These choices will directly affect the business decisions of
countless financial institutions and investors and help
determine the framework for millions of households to borrow
money for buying a home.
FHFA looks forward to working with this committee, other
Members of Congress, and the Administration to make these
policy determinations and end these conservatorships.
Thank you again for inviting me here today, and I look
forward to discussing these important matters with the
committee.
[The prepared statement of Acting Director DeMarco can be
found on page 54 of the appendix.]
Chairman Hensarling. Thank you, Mr. DeMarco, for your
testimony.
The Chair now recognizes himself for 5 minutes.
Mr. DeMarco, on page four of your testimony you use the
term ``sustainable,'' that you are focusing on a more secure,
sustainable, and competitive model for the secondary mortgage
market.
Jeffrey Lacker, the President of the Richmond Federal
Reserve, has said, ``We should phase out government guarantees
for home mortgage debt. Otherwise, financial stability will be
elusive and fiscal balance will be threatened by repeated boom-
bust cycles in housing. Homeownership may be a laudable social
goal, but if that is our objective we should subsidize housing
equity, not housing debt.''
I, too, am focused on a sustainable housing finance system.
Mr. Lacker is obviously of the belief that our current system
can foment boom-bust cycles.
From your perch, and 20 years of experience in housing
finance, do you see that as a risk? And how do you use the term
``sustainable,'' as you used it in your testimony?
Mr. DeMarco. I certainly think that the housing market does
go through cycles, and we have certainly experienced a
wrenching nationwide cycle now. And, I think that there is
plenty of argument out there that a contributing factor has
been some government policies. But that is certainly not the
only thing contributing to the problems we have had the last
few years.
What I mean by sustainable is we are trying to build a
market that truly can last for years and function with whatever
role government has, that both government and private market
participants can rely upon the soundness and stability of that
model. So the infrastructure that we are trying to build is one
that starts with basic building blocks--something as simple as
data.
The first real step FHFA took as conservator to get moving
on this future is something we announced back in 2010 with the
Uniform Mortgage Data Program. We wanted to do something as
simple as bring to the mortgage industry a standard set of data
definitions for what gets reported on a mortgage application
and comes to an investor, what the form and format and
definitions for an appraisal look like so that we have
consistency of data and that produces more quality.
It is a very basic building block. It sounds ho-hum. It is
essential to building a sustainable model.
We are also looking at bringing standards to the
marketplace.
Chairman Hensarling. Mr. DeMarco, on page 15 of your
testimony--any system of housing finance is going to have some
cost, some benefits. On page 15, in talking about some of the
Federal housing policies, including explicit credit support,
you said such policies ``further direct our nation's investment
dollars towards housing. It would also drive up the price of
housing, other things being equal.''
So are you saying that credit guarantees, for what they do,
perhaps, to lower interest rates--and I think the last data I
saw from the Federal Reserve study of several years ago that
the Fannie and Freddie model saves about seven basis points off
of the interest to help the consumer but that the consumer may
pay on the back end by paying more on their principal. Is that
what you are saying in your testimony?
Mr. DeMarco. Essentially. Right now, as has been pointed
out in the opening remarks, over 90 percent of mortgage
securitization is being backed by the taxpayer either through
Ginnie Mae or through the Treasury support of Fannie and
Freddie. If you subsidize this credit to everyone buying a
house, you are essentially subsidizing no one. It is causing,
just in sort of simple supply-and-demand terms, the price of
the good to go up.
So if there is this broad, across-the-entire-market subsidy
to housing credit, some portion or a good portion of that gets
captured by the home seller and is leading to higher prices.
Chairman Hensarling. I am running out of time here, so your
answer may have to come in writing, but I am curious, what is
it that we can do to incent private capital to come into the
marketplace, as I observed, trillions of dollars of excess
reserves of either banks or non-financial corporate balance
sheets?
And I hope somewhere that we will pursue the questioning--I
understand you have raised g-fees twice. I am curious, why not
a third or fourth time?
But my own time has expired.
I now recognize the ranking member for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
During the 112th and 113th Congresses, we have yet to have
a hearing on various bipartisan GSE reform proposals introduced
in the House of Representatives. We also did not have a hearing
on Chairman Hensarling's proposal from the 112th Congress,
which would have liquidated the GSEs and then hoped that the
private markets would pick up the pieces.
Whichever approach you support, I think you agree that the
Congress should be convening hearings on specific GSE reform
proposals. From your perspective, Mr. DeMarco, as conservator,
what are the costs of doing nothing?
Mr. DeMarco. The costs of doing nothing are that we are
continuing to risk the taxpayer support of Fannie Mae and
Freddie Mac and we are making it harder for investors to return
to this market and have confidence about what the rules of the
road in mortgage lending are going to be going forward.
Ms. Waters. In the absence of legislation, however, it
seems--and I have had this discussion with you--that you have
broadly interpreted your mandate to not only act as a
conservator but to aggressively wind down the GSEs' market
presence and entirely reform the secondary mortgage market. In
your testimony, you propose winding down the investment
portfolio at a faster rate than agreed to with the Treasury,
reducing the GSEs' participation in the multi-family market
even when it is unclear that private lenders would fill the
affordable rental housing space, and increase the cost of
single-family housing by offloading credit risk and raising
guaranteed fees even higher.
Given that you are not Presidentially-appointed, permanent
Director, where do you draw the line in terms of what you are
able to do? Hypothetically, could you raise g-fees an unlimited
amount? Could you wind down retained portfolios to zero? How
are your decisions being informed by Congress and the
Administration?
Mr. DeMarco. Ranking Member Waters, I would welcome as much
congressional direction and legislation on these matters as we
could get. For my part, what motivates me and what constrains
me is the statutes that Congress has enacted that provide the
guardrails about what it is FHFA is supposed to do both as
regulator and as conservator.
I am also informed by observing that within the Congress of
the United States, while there have been a number of proposals
for housing finance, none of them have involved restoring
Fannie Mae and Freddie Mac to their pre-conservatorship
corporate form. I am mindful that the Administration has
repeatedly discussed its intent to wind down the Enterprises.
And I have tried to take a transparent process with
Congress in explaining what it is we are doing and why, and
with this strategic plan over a year ago, laid out for Congress
my thoughts about where FHFA found itself as conservator, how
it viewed its statutory responsibilities, and the gradual steps
we plan to take under that strategic plan. So I have tried to
be transparent about this and move in a thoughtful but gradual
manner.
Ms. Waters. The Treasury and the FHFA agreed to an
increased portfolio reduction of 15 percent per year last
summer. Why do you feel it is necessary to require the GSEs to
exceed this target by selling less liquid assets? How will you
ensure that such sales will not result in reduced return to the
taxpayer?
Mr. DeMarco. One of the requirements we placed on them is
that these transactions be economically sensible. But I would
point out that within the 15 percent reduction that is under
the Treasury agreement, Fannie Mae and Freddie Mac can achieve
that over the next couple of years by doing nothing, simply by
absorbing the natural runoff of their retained portfolio.
I am trying to shrink their operations. I am trying to de-
risk the companies so that we can get some of this risk off the
back of the American taxpayer, and we are trying to take a
gradual approach to doing that by encouraging sales of certain
non-liquid assets on their portfolio.
This will also ease the job for Congress in terms of
thinking about a transition away from Fannie and Freddie in
conservatorship to a future model. The more we can simplify
their operation and gradually shrink them, that makes the
transition easier.
Ms. Waters. In the multi-family space, you have set a
target of 10 percent reduction in multi-family business new
acquisitions in 2012. What will be the impact of this reduction
on rental prices?
Mr. DeMarco. I would not expect there to be any meaningful
impact. Fannie Mae and Freddie Mac, in the early years of the
conservatorship, their share in the multi-family mortgage
market increased substantially. In 2012, it decreased; in 2013,
what I want is to see that decrease continue. And we also have
reason to believe that the overall size of the multi-family
market is going to gradually decline.
So what I am trying to avoid is Fannie Mae and Freddie Mac
operating with this government backing, taking on a greater
share of the market than should be the case.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, Mr. Garrett, the chairman of the Capital
Markets and Government Sponsored Enterprises Subcommittee, for
5 minutes.
Mr. Garrett. Thank you, again, Mr. Chairman.
And thank you, Director.
Let me just follow up. You said something interesting in
response to the chairman's question about having such a--90
percent of the market and subsidizing the market to such an
extent you said we are basically subsidizing everybody, right?
That is interesting.
When you subsidize everybody, what is the effect on pricing
in the market and what is the effect on the first-time
homebuyer trying to get into that market?
Mr. DeMarco. Basic economics would suggest that if you are
subsidizing everybody on the demand side for housing, it is
going to push up the price of housing, other things being
equal. Now, there are a lot of other things going on in the
marketplace, including the actions of the Federal Reserve, but
that is just a basic economic observation.
Mr. Garrett. But when you said it is, a light bulb just
went off there because for those who say, ``Let's just
subsidize everyone,'' at the end of the day you are actually
harming them, because it is 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, in the
meantime, to the public, because the GSEs have credit risk,
right?
Mr. DeMarco. Yes, sir.
Mr. Garrett. Okay, and so can you just talk a little bit
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 you and I as taxpayers have credit risk too, right?
Mr. DeMarco. That is correct.
Mr. Garrett. What are your plans there?
Mr. DeMarco. Right now, with every single-family mortgage
that Fannie Mae and Freddie Mac buy and then securitize, they
are standing behind that mortgage 100 percent, which means the
American taxpayer is standing behind it. What we would like to
do is engage in transactions with private investors, with
capital markets--to sell off some portion of this credit risk,
meaning that if 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.
Mr. Garrett. You mentioned somewhere that you have a target
of around $30 billion in 2013, is that right?
Mr. DeMarco. Yes, sir.
Mr. Garrett. Is that the total amount of risk that we would
be sending out to the private sector, or do you--
Mr. DeMarco. No, sir. That is the unpaid principal balance
of mortgages. So we want to see $30 billion worth of mortgages
in which there is some amount of the credit loss associated
with those mortgages has been sold off to the private market.
Mr. Garrett. And what is that percentage-wise of all the
credit risk that the GSEs have out there?
Mr. DeMarco. Between them right now, in terms of the stock,
they have about $5 trillion in mortgage guarantees. So it is a
pretty tiny fraction.
Mr. Garrett. This is less than a pilot program.
Mr. DeMarco. It is a start.
Mr. Garrett. It is a start. Great.
Another issue that we are dealing with is trying to deal
with the sequester, right? And some ideas have come out
supposedly to try to come up with other revenue to make up for
lost revenue.
There was a bipartisan bill introduced last week to prevent
the U.S. Treasury and the Administration from conducting an IPO
with Fannie and Freddie, to basically sell part of them off--
spin them off to the private sector and use that money as a new
revenue stream. Have you heard about that? And what can you
tell us about whether that would be a good idea or a bad idea?
Mr. DeMarco. I am generally familiar with the bill. I am
not sure who would want to purchase equity sold by these
companies but I understood, really, the intent of the sponsors
of that bill to say that we wanted to ensure that the Congress
of the United States had a say in the disposition of Fannie Mae
and Freddie Mac.
Mr. Garrett. Okay. You know about the bill, but have you
heard, is that something that the Administration is actually--
Mr. DeMarco. No, sir. I am not aware that is being
contemplated.
Mr. Garrett. So, this would be one of the worst things that
we could do, or the Administration could do, if they actually
did that? If so, why would it be? Because you would be making
money right, wouldn't it?
Mr. DeMarco. Right now, they are starting to make money,
yes, and I am pleased by that. That money, right now, every
quarter is swept in a dividend payment back to the Treasury
Department, and the way the senior agreement with the Treasury
works is the actual liquidation preference of that senior
preferred stock does not decline regardless of how much is paid
in dividends. So there is still a liquidation preference
retained by the Treasury Department that is substantial.
Mr. Garrett. And isn't the bottom line also that if we did
this, it would basically just put us back into the situation
that we were pre-crisis days as far as this public-private
partnership that just did not work?
Mr. DeMarco. Yes, sir. If we tried to, in any fashion,
recapitalize Fannie and Freddie as they are and put them back
out there.
Mr. Garrett. In my closing time, you are familiar with the
preferred stock purchase agreements and the changes that the
Administration made to it recently, I guess last year. Can you
just talk about that, whether these changes hurt or helped your
ability to fix or reform the system?
Mr. DeMarco. I think that they helped in that they provided
some assurance to investors in Fannie Mae and Freddie Mac
securities that the dividend at 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 taxpayer starts to see even more of a return on the support
that has been provided and it does not allow for the companies
to take their earnings and essentially recapitalize themselves.
Mr. Garrett. I thank the gentleman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. Why did Fannie and Freddie get into subprime
lending, and what steps have you put in place to prevent any
entity, whatever is there, from taking that action in the
future?
Mr. DeMarco. It is a complicated story with regard to the
Enterprises' participation in subprime lending, but clearly it
was driven by what was going on more broadly in the
marketplace. There was a sense that Fannie Mae and Freddie Mac
were losing market share to private participants; there was a
sense of serving more borrowers at the margin of the mortgage
market; and there was a sense that the strength of the U.S.
housing market was such that home prices were going to continue
to rise. So there were a lot of things going into their
participation in that marketplace.
With regard to where we are today, we have undertaken a
couple of pretty important steps. One of them is that the
pricing of guarantee fees is much more risk-based today than it
was. They were clearly underpricing risk in the marketplace.
The second is that underwriting standards have been
improved. And the third is that through the discipline on
lenders through things like enforcing reps and warrants, we are
getting better discipline in the origination process with
regard to ensuring that mortgages which are being produced
today comply with the standards that Fannie and Freddie have.
Mrs. Maloney. I am concerned about the multi-family
housing, and I want to quote from your remarks that you gave at
the National Press Club on March 7th: ``We are setting a target
of a 10 percent reduction in multi-family business volume from
2012 levels. We expect that this reduction will be achieved
through some combination of increased pricing, more limited
product offerings, and tighter overall underwriting
standards.''
Multi-family housing is a critically important base for
affordable housing in our country--well over 15 million people
rely on it: seniors; students; low-income; and moderate-income
families--and I feel that preserving it is very important. So
first I want to know, how did you decide on a 10 percent
reduction as the appropriate volume? And have you done any
studies to see if the private sector will pick up in this area
and continue to help us with affordable multi-family housing?
Mr. DeMarco. Of course. And certainly, Congresswoman, I
share your feeling that the multi-family market is critical to
housing our citizens and it is particularly an important source
of housing for low- and moderate-income households.
With that said, we came to the 10 percent through looking
at a variety of things, including the market size, the
traditional role of Fannie and Freddie in this market space,
expectations about the size of the market in the future, and
recognizing that we did have a goal of gradually reducing the
Enterprises' footprint in the marketplace.
Also paying attention to and being mindful of, unlike
single-family where, as we talked earlier, over 90 percent of
the secondary market activity is through the government, that
is not the case in the multi-family market. The multi-family
market retains a good bit of private capital participation and
competition in that marketplace and I certainly have been
hearing from the banking community that they want to
participate in this market, they are active participants in it,
and they are concerned about Fannie and Freddie operating with
this kind of government backing having an unfair advantage in
that market. So I am comfortable that there is private capital
actively competing in this marketplace.
All that said, I want to assure you that we intend to
monitor how this is carried out by the companies and how this
market evolves, and to be mindful of that. And we have reminded
the companies of their statutory mission to support affordable
housing.
Mrs. Maloney. Have you consulted with the Treasury
Department and FHA about this target and are they part of this
decision?
Mr. DeMarco. Yes. I consulted with both of those
departments in advance of announcing this decision.
Mrs. Maloney. And I also want to question one of your
speeches on March 7th on the differences between the single-
family businesses and the multi-family businesses. Are you
approaching them differently in your approach for the future?
Mr. DeMarco. Yes, we are. And that is a good thing for me
to explain, the reasoning here.
With single-family mortgages, Fannie and Freddie are
retaining all of the risk when they buy the mortgage. In most
of the multi-family mortgages they buy, they are already doing
risk-sharing with private capital. I am trying to get the
single-family to look a bit more like multi-family, where there
is risk-sharing with private capital.
Mrs. Maloney. Thank you.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from California, Mr.
Miller, the vice chairman of the committee, for 5 minutes.
Mr. Miller. Thank you.
Mr. DeMarco, I have enjoyed some of your responses to the
questions asked. In 2001, I started introducing language that
defines subprime versus predatory. I think I got in three or
four bills to the Senate which--I'm sad to say, they did
nothing with them--really had specifics on underwriting
standards.
But you have released your conservator scorecard in--I
believe this was March 4th. And you had detailed specific
priorities on three strategic goals. That sounds a lot like a
bill I introduced with Mrs. McCarthy last year and I am glad
you are moving that direction. But what effect do you think the
new platform will have on getting the private sector money back
to the secondary market?
Mr. DeMarco. I think it has an opportunity to be an
important contributing factor to bringing private capital back
into the marketplace. When you think about investors in private
label mortgage-backed securities and the losses that they have
suffered and the problems that have become apparent as a result
of the collapse of the housing system, I think that investors
are going to be more comfortable bringing private capital back
to the mortgage market if they can rely better on how
securities are going to work, what the rights and protections
of investors are, how mortgages are going to be serviced, and
what kind of transparency there is with regard to the actual
performance of the underlying mortgages.
These are all things we are trying to bring to this
platform and we think it will make returning to this market
more attractive for investors.
Mr. Miller. The problem I have with the hybrid model
without Freddie and Fannie is you have taxpayers being put at
risk but the private sector is making all the profit. And you
can see where Freddie and Fannie went wrong when they started
taking market share to appease their stockholders, basically,
and then made every mistake they could make at that point.
But what advantages or disadvantages do you see in spinning
this platform off as a private entity?
Mr. DeMarco. We are constructing it as a jointly owned
entity of Fannie and Freddie. I really expect the Congress of
the United States to make the final determination.
It is an asset of the conservatorship so it is going to be
up to Congress to determine the disposition. Your options are
essentially: you can make it a government-owned corporation;
you can sell it to a private entity; or you can turn it into a
market utility and have it operate really as just that, as a
financial market utility.
Mr. Miller. My concern is the approach we use on turning it
into a private entity. Do you envision avoiding this flaw we
have had in the past of a hybrid model that exists with Fannie
and Freddie today?
Mr. DeMarco. Without some sort of control or knowing what
the governing mechanism is, it is certainly open to going in a
direction other than the one I am designing for right now.
Mr. Miller. What do you see as the benefits in spinning it
off as a private entity, as you talked about--
Mr. DeMarco. Let me say this: I think that the larger
benefit, if I may, on this particular one is, I think,
structuring it as a market utility--not as a for-profit entity
but as something there to serve market participants. And one of
the things that I would be concerned about is making sure that
however this thing operates in the future, it operates so that
small and mid-sized lenders have fair access to secondary
market execution.
Mr. Miller. The concern I have is, if you look at the FHFA
today, there has been some debate on that, and I don't think
the FHFA is necessarily crowding out the private sector as the
private sector is not crowding in today. And much of that is
due to legislation we have enacted on the private sector and
the confusion we have created out there, which I think we have
to eliminate.
But what are the main barriers you see today that prevent
private capital from entering the mortgage market and secondary
market finances as a loan?
Mr. DeMarco. I think there are a number of things still
inhibiting the full return. One of them is that Fannie Mae and
Freddie Mac are still the dominant players in the marketplace
and they are operating with taxpayer support, which puts them
in a place that other private investors cannot get to.
The other is that the infrastructure for establishing
standards and allowing for investors to feel comfortable
returning is not there. And there is still plenty of regulatory
uncertainty with regard to a range of things, from risk-based
capital rules to regulations still to be implemented under
Dodd-Frank.
Mr. Miller. You have talked about the contraction of the
GSEs and eliminated the concept of being the dominant presence
in the marketplace, and they are reforms you are enacting
today. But how do the barriers that we have created for you
through legislation--the Dodd-Frank Act and such--impact your
ability to do that?
Mr. DeMarco. The biggest impediment, I suppose, for me, or
the thing I could use most from Congress is legislative
direction. Even if it is not the whole picture, at least to
start to provide some sense of--
Mr. Miller. Parameters within which you could work,
basically?
Mr. DeMarco. Parameters, yes, with respect to--take this
platform, take how to gradually shrink Fannie and Freddie's
presence in the marketplace. There are steps that we could take
incrementally today.
Mr. Miller. Thank you. I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. DeMarco, the FHFA has proposed reducing the mortgage
guarantee fees on a State-by-State basis. To determine the new
fees, you will look at the length of judicial actions and cost
of legal services, two factors that have high correlation to
States with robust consumer protection laws.
As a result, New Yorkers will see the highest increase in
g-fees under your proposal. Do you think it is fair for
borrowers in New York to be saddled with higher fees just
because the State requires accurate documentation and holds
mortgage servicers accountable in the foreclosure process?
Mr. DeMarco. Congresswoman, with respect to the State of
New York or any other State, the residents of that State get
the benefit of that protection, and if that benefit carries
some cost, this is having the residents of that State also bear
the cost that goes along with that benefit, as opposed to the
residents of all the other States paying that cost.
But I would say with regard to the State g-fees--
Ms. Velazquez. Let me ask you this question: The underlying
message that you are sending to States like New York is, ``That
is a wrong approach, to provide robust consumer protections,''
because--
Mr. DeMarco. Absolutely not. That is not the intent of my
message at all.
My message to the State of New York is that you are three
standard deviations removed from the rest of the country with
regard to how long it takes an investor to secure their
security interest in a mortgage after the borrower defaults,
and that imposes a great deal of added cost on Fannie and
Freddie.
Ms. Velazquez. So borrowers will face higher fees?
Mr. DeMarco. We have proposed that, and I have put it out
for public comment. We are evaluating the--
Ms. Velazquez. And so we have--they will be--
Mr. DeMarco. We are evaluating the comments--
Ms. Velazquez. --accountable for the financial crisis for
which they were not to blame.
Mr. DeMarco, you continue to reject principal reductions
that could help underwater homeowners despite analysis that
shows billions of dollars in long-term savings. As you know,
the rationale for not participating has been the fear of
borrowers strategically defaulting to receive benefits.
So you cannot draft rules that will reduce the risk of
fraud while also facilitating a faster housing market recovery
and taxpayer savings.
Mr. DeMarco. With regard to that issue, Congresswoman, the
FHFA spent 6 hard months carefully studying and analyzing the
principal reduction alternative under HAMP, which is what the
Treasury Department asked us to do. We put out extensive
analytics regarding the work we did and the conclusions we drew
and the basis for that conclusion, and I think that we have
documented the reasons why we declined participating in the
principal reduction alternative for HAMP.
With that said, we continue on a path of energetic effort
to provide foreclosure prevention alternatives to homeowners
with Fannie and Freddie loans who get in trouble on their
mortgage, and as I went through in my earlier remarks, I think
we have demonstrated that through over 2 million homeowners in
trouble on their mortgage being able to retain their homes--
Ms. Velazquez. Out of how many millions--11 million?
Mr. DeMarco. It has to be with regard to the number of
borrowers who are in trouble.
Ms. Velazquez. Mr. DeMarco, I heard your answer to the
Congresswoman from New York about reducing the business volume
to 10 percent, and so it doesn't make economic sense to me that
you are going to reduce a 10 percent volume in one of the most
profitable, stable portfolios that they have. Why is that?
Mr. DeMarco. Right. Because it is not the actually--as
conservator, we have set out to gradually shrink the
Enterprises' footprint in the marketplace so that we can
restore order to private capital, and I believe that the multi-
family segment needs to be part of that just like the single-
family segment does and the retained portfolio does.
Ms. Velazquez. We heard that the National Association of
Home Builders estimates that up to 400,000 new multi-family
housing units will need to be built each year for the next 10
years to keep up with demand, so it doesn't make sense--
Chairman Hensarling. The time of the gentlelady has
expired.
Did you finish the question? He can answer in writing.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Hensarling. Okay.
In that case, the gentlelady from New York is recognized
for a unanimous consent request.
Mrs. Maloney. Thank you, Mr. Chairman. I ask unanimous
consent to place in the record a letter signed by numerous
Members of Congress in support of the gentlelady's position
that guaranteed fees should be related to outcome--keeping
people in their homes--and States should not be penalized for
policies that--
Chairman Hensarling. Without objection, it is so ordered.
Mrs. Maloney. Thank you.
Chairman Hensarling. The Chair now recognizes the
gentlelady from West Virginia, Mrs. Capito, for 5 minutes.
Mrs. Capito. Thank you, Mr. Chairman.
I want to talk timing here. You have talked about reshaping
and repositioning the GSEs. One of the great questions that I
think we have before our committee, and you have asked for
congressional guidance is, what is 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 is 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 would like to hear your thoughts on that question.
Mr. DeMarco. I think that is a very fair concern, given the
trauma our country's housing system has gone through. But now
that we are 4\1/2\ years into the conservatorships, we clearly
are seeing signs of recovery in housing across most of our
markets in the United States.
So I do believe it is certainly time to begin that gradual
stepping back, and we are trying to do that, to get it started,
do it gradually.
But I also believe it is 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 that
we have outlined with regard to contracting the Enterprises'
footprint in the marketplace is meant to be gradual, done
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.
Mrs. Capito. I know you are not going to react to specific
timeframes but are you talking about a 5- to 10-year timeframe,
or are you talking about a 10- to 25-year, or--
Mr. DeMarco. I would like to see this within 5 years. I
wouldn't even go 5 to 10 years. I think we should be moving
ahead now.
Mrs. Capito. All right. Thank you.
The Consumer Financial Protection Bureau (CFPB) has put out
a rule on the Qualified Mortgage (QM), and my understanding is
that if your loan is securitized by Fannie or Freddie, you are
automatically considered a qualified mortgage. In my view, I
think this leads to more expansion of Fannie and Freddie
participation because the lender is going to want a QM, the
borrower is going to want a QM for a lot of different reasons.
Do you have any thoughts on that issue?
Mr. DeMarco. This is a pretty fresh rule, and we are
actually analyzing it to understand the CFPB's--the way they
define QM outside of the GSE realm and then looking at what the
underwriting rules of Fannie and Freddie are, that go beyond
QM, and we are actually reexamining 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 of, we
are trying to contract the significance of Fannie and Freddie
in the marketplace.
Mrs. Capito. Do you anticipate that Fannie and Freddie
would--because they are going to write their own rule for a QM
or have their own parameters. Is that correct?
Mr. DeMarco. They have their own underwriting rules--
Mrs. Capito. Okay.
Mr. DeMarco. --and so we are looking at that with--in light
of what the CFPB has determined is appropriate to define QM in
the non-GSE realm.
Mrs. Capito. Do you think there could be a scenario where
you have a QM--you have a Qualified Mortgage in one scenario
but in the Fannie and Freddie realm, it is not quite a QM? To
me, that would lead to massive confusion.
Mr. DeMarco. 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.
Mrs. Capito. Okay.
The other question I is on the taxpayer protection issue.
Could you--I only have about a minute left, and I know this is
very complicated, but in my opening statement I talked about
the $187 billion or whatever the exact figure is, and then we
have 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 am asking is if the taxpayers are ever
going to get their money back?
Mr. DeMarco. The amount that the taxpayers have put in with
regard to covering the losses of Fannie and Freddie is not
being reduced through these dividend payments.
The taxpayer is getting back a return on the capital that
is put in; it is a dividend on the capital put in. But it is
not a repayment of that capital. We are not lowering the amount
that is owed to the Treasury Department under the senior
preferred agreement.
Mrs. Capito. If the improvements continue, would that be a
scenario where the principal would begin to get repaid, or do
you--
Mr. DeMarco. That is not how the agreement is structured.
Mrs. Capito. That is not the agreement. Okay. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. Watt, for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman. Mr. Chairman, in light
of media speculation which started over the weekend, I decided
to attend today's hearing as a member of this committee because
of the critical importance of the subject being addressed. I am
here solely to listen and not to engage. Therefore, I am going
to yield back the balance of my time.
Chairman Hensarling. The gentleman yields back the balance
of his time.
The Chair now recognizes the gentleman from Texas, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. DeMarco, I want to go back to something that you were
saying a while ago and kind of get you to rephrase that because
obviously there has been a lot of controversy about the
principal writedown policy. In fact, there were some people
here earlier who I think disagree with you, if you may have
noticed, I don't know.
I think you spent an inordinate amount of time researching
that issue. Is that correct?
Mr. DeMarco. Yes, sir.
Mr. Neugebauer. And the finding was--and it is your
responsibility as the conservator--your responsibility is to
conserve and do what is in the best interest of the taxpayers.
Is that correct?
Mr. DeMarco. Yes, sir.
Mr. Neugebauer. And so did you conclude, then, that writing
principal down for people who were already paying their
mortgages was not in the best interest of the taxpayers?
Mr. DeMarco. Yes, sir.
Mr. Neugebauer. So I think it is kind of interesting, one
of the things that has been said about the housing crisis is
that Freddie and Fannie played a part in it, and there are a
lot of people to blame, but one of the things that keeps kind
of coming up is that Freddie and Fannie were being used by
Congress and other political influence to make housing policy
that wasn't necessarily sound. Would you concur with that
finding?
Mr. DeMarco. I would, sir, yes.
Mr. Neugebauer. Yes. But isn't it kind of interesting that
it is still going on?
Mr. DeMarco. It has a certain irony after $188 billion of
taxpayer money going into them.
Mr. Neugebauer. Yes. We still have people who want to
continue to use Freddie and Fannie for housing policy. Is that
correct?
Mr. DeMarco. It would appear that way, yes.
Mr. Neugebauer. Yes. So I found it kind of interesting, I
noticed that there were a couple of--I don't know how many
people were involved, but some attorneys general are calling
for your replacement because you didn't buy into the principal
writedown program, so--and I guess--I think it is also
interesting, some of those attorneys general also were part of
the settlement. And what we do know is 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?
Mr. DeMarco. From what I have read in press reports, yes,
sir.
Mr. Neugebauer. So I think one of the things that it points
out is the reason that we need to begin to diminish the Freddie
and Fannie role is that we--I think you heard me say in my
opening testimony that we don't seem to have learned any of the
lessons and that, in fact, there just continues to be pressure
from within Congress and outside groups for Freddie and Fannie
to keep doing what they have been doing. And basically what you
testified is we are just putting more and more potential
contingent liability on the American taxpayers. Is that a fair
assessment?
Mr. DeMarco. It is. And certainly, as was demonstrated
here, this is an emotional issue. It is one that affects real
families. And I take very seriously the harm that this
financial crisis and this housing crisis has imposed on
families across the country.
But we have tough decisions to make and we have 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.
Mr. Neugebauer. I want to go back to one other issue, and
that is the portfolio. And you and I have had some discussions
about that.
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 Reserve seems to be on a mission to try to see if we
can get these rates lower. And so, my opinion is that the value
of your portfolio has to be at its maximum right 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?
Mr. DeMarco. For certain portions of the portfolio, yes;
for others, there may be more critical economic factors
affecting the value of the assets.
Mr. Neugebauer. What efforts do you currently have underway
to kind of accelerate the reduction of the portfolio and what
are some of the things you are doing in that respect?
Mr. DeMarco. An important thing to understand about the
retained portfolios of Fannie and Freddie is that they look--
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 it 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 have run off the more liquid stuff, including
their own mortgage-backed securities, or sold that into the
marketplace, they are left with less liquid assets, and that is
what we are trying to gradually get off their balance sheet.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. There seems to be a universal belief that it
is a bad idea to have the taxpayers take all the risk and
private shareholders get the upside. We tend to view the two
GSEs as government agencies, but as I understand it,
technically they are 21 percent owned by their private
shareholders. Furthermore, by keeping this 21 percent
ownership, the net operating losses--the tax benefits--are
still retained, in effect, by these entities.
We have a net of $137 billion of taxpayer money. It is on
its way up to maybe $200 billion. Haven't the taxpayers done
enough to deserve 100 percent ownership of these entities and
to know that we are not going to lose revenue to the net
operating loss carry-forwards? Why aren't we taking steps to
acquire 100 percent ownership?
Mr. DeMarco. We are looking forward to legislative action
by the Congress of the United States to make those
determinations.
Mr. Sherman. But until then, the taxpayers own 21 percent
of something we are already paying $137 billion for, and until
then, we are going to suffer the tax reductions of the largest
pool of net operating losses I am aware of--losses in effect
financed by our money. Perhaps there will be some action by
Congress on that.
Mr. DeMarco. I would welcome it.
Mr. Sherman. I would ask you to propose some, as a matter
of fact. I would like to get your technical assistance in
putting that together.
Over the last year or so, you have raised the guarantee
fees in an attempt to level the playing field for private
capital. Can you provide the committee with your findings
regarding any increase in private capital participation in the
secondary market as a result of your fees or in conjunction
with your fees being increased?
Mr. DeMarco. Given that along with Ginnie Mae, Fannie and
Freddie are still representing over 90 percent of the
securitization market and well over 80 percent of mortgage
flow, one can't say that this has led to a dramatic reversal
with regard to their share. But I can report, and I have said
this publicly, that in our own conversations with market
participants and observations of market practices, we do
believe we are getting closer to a price at which we are going
to see more mortgages not get sold to Fannie and Freddie
because there is a more profitable execution elsewhere in the
marketplace.
Mr. Sherman. So you think you are getting there but you are
not--
Mr. DeMarco. We are making progress, sir.
Mr. Sherman. You are not there yet.
I just want to comment that it was interesting to hear your
opening remarks saying that the beneficiaries of the GSE
activity are not so much the homebuyer as the homeowner, but I
don't think that is necessarily a bad thing. Had we seen a
further collapse in home prices, this country would be in much
worse shape than we are now.
Mr. DeMarco. And I wasn't putting a value judgment on it,
Congressman. I was simply--
Mr. Sherman. Yes.
Mr. DeMarco. --noting that if you are subsidizing
everybody, there is a basic economic principle--
Mr. Sherman. I think we all understand that you provide
lower interest rates and that supports housing prices.
Can you provide the committee with a timeline for the
completion of this single securitization platform that you are
constructing?
Mr. DeMarco. I cannot. We said at the outset that it would
be a multi-year effort. In response to an earlier question, I
said that I would like to see this--I think this transition can
be done within 5 years, but beyond that it is very hard to put
a strict timeline on something when you are still in the design
phase, trying to scope out what it is, and it is a pretty
material undertaking, including a good bit of--
Mr. Sherman. You have talked about creating a ``market
utility or public utility.'' There are private sector
enterprises and we could have some public utility that can
package loans and sell them into the market. But only the
Federal Government can provide a Federal guarantee.
Are you anticipating that this public utility is providing
a Federal guarantee or just packaging and selling?
Mr. DeMarco. I am anticipating that this utility will be
structured in such a way that it can issue mortgage-backed
securities that have a Federal guarantee on them and it can
also issue mortgage-backed securities that do not have a
Federal guarantee on them. They would not, presumably, be the
entity providing that guarantee for the government. This is the
operational platform under which the securities would be
produced, sold into the marketplace, and because they would be
done as a market utility, that consistency would make the
market more liquid.
Mr. Sherman. Thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. McHenry, for 5 minutes.
Mr. McHenry. Mr. DeMarco, thank you for your service to our
people and within our government.
I want to sort of take off from the previous line of
questioning. You said that 90 percent of new mortgage
originations are backed by the Federal Government. And a
majority of the outstanding mortgages you preside over in what
is the successor of Fannie and Freddie.
Now, I bring this up because the chairman started by
asking--his final question was about how do you incentivize
private capital back into this marketplace. Let me begin one
step before that, which is, what are the current barriers to
private capital coming into this secondary mortgage market?
Mr. DeMarco. The dominant portion of the market being
served by Fannie and Freddie operating with taxpayer support,
uncertainty about what the government's role in the future is
going to be, including the timing and ultimate disposition of
Fannie and Freddie. There is uncertainty with regard to
rulemakings that are still pending in the marketplace,
including capital rules, and waiting to see a bit more how the
market itself regains its footing. These are all contributing
factors.
Mr. McHenry. So the first factor, which is the government
backing, makes these mortgages cheaper, which means the private
sector can't compete? Is that--
Mr. DeMarco. That is basically it, yes.
Mr. McHenry. That is basically it. Okay.
So how can we incentivize private capital to come in?
Mr. DeMarco. One way we can do it, and that we are doing it
is we are--as we talked about earlier in this hearing--
gradually increasing guarantee fees to move towards a pricing
that was reflective of what private capital would expect to
manage that risk for its own--with putting its own equity in
place. That is an important component.
Mr. McHenry. Have you taken steps to actually put the two
separate platforms of Fannie and Freddie together, and is that
process ongoing?
Mr. DeMarco. It is. And that is part of our conservator
mandate. It is not just about building for the future, as
important as that is.
Fannie and Freddie are operating a combined $5 trillion
book of business. We have to continue to invest in the
infrastructure for that business.
And, I have spent a lot of time thinking, what does it mean
as conservator of two companies that the Administration says it
wants to wind down? How do I invest taxpayer dollars in
continuing to develop and strengthen the underlying
infrastructure of their securitization business, using taxpayer
money, if at the same time we are expecting ultimately to wind
these things down? So the platform gives us a more efficient
way of utilizing taxpayer dollars.
Mr. McHenry. What are the advantages and disadvantages of
spinning off that entity as a private versus sort of a
government-owned utility?
Mr. DeMarco. I think that certainly if private market
participants thought they had a greater stake in what this
platform was doing, we would get their input into it, and it
would help shape the design. I said when I put out the
scorecard, we are intending to develop a formal mechanism to be
receiving market input on this, but I think that the more they
see that this is something that they can have access to and
participate in, what it does to serve the market will attract
them more to what we are doing.
Mr. McHenry. In previous hearings, I have been very frank
with the position you have been put in as acting Director and
the decisions you have had to make. Now I just ask very broadly
and simply, what is your role here as conservator?
What does that mean? Does that mean you are here to protect
the taxpayer? Does it mean you are here to see a vibrant
housing marketplace and increasing values? Is it to make sure
that investors are rewarded for investing in these entities?
What is your purpose and role?
Mr. DeMarco. Almost all of that, Congressman. In my
prepared statement, I go through the statutory provision here,
but fundamentally, we have a responsibility as conservator to
conserve and preserve the assets. And what that means with the
American taxpayer providing this capital, with all the risk
exposure on the legacy book, that meant minimizing losses.
We also have a responsibility for ensuring stability and
liquidity in the mortgage market and the statute also tells us
we have to maximize our efforts to prevent foreclosures subject
to a net present value test where we are protecting taxpayers.
Chairman Hensarling. The Chair now recognizes the gentleman
from New York, Mr. Meeks, for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
Mr. DeMarco, let me pick up on a couple of things--couple
of questions, I think, that were asked by Mr. Sherman first,
and that is--let me first deal with the public utility that you
proposed. I am wondering, what actions will you take to ensure
that the large banks and investment firms and others who were
bad actors, actually, that were shown to have contributed to
the financial crises, to prohibit them from utilizing these
public utilities that you proposed?
Mr. DeMarco. Yes. I think that one of the really important
things about restoring industry standards from data to the way
mortgage securitization is done, by getting that to be a single
industry standard rather than a set of proprietary standards
operated by major, huge financial institutions--by doing that,
Congressman, I think we make it easier for small and mid-sized
institutions to continue to be active participants in this
marketplace. Because then the industry and the vendors that
serve this industry have to develop the technology just once
and then that technology is available to all market
participants.
That is why I think it is so important to get these
standards done and to have standard contracts, standard
disclosures, standard data reporting, because I think that is
what is going to help a lot of the small and mid-sized
participants to remain active in this marketplace.
Also, what we are looking for with this platform is it is
very important to me that this operate in such a way that if
you are a local bank in the State of New York or wherever, that
you have access to the secondary mortgage market so that you
can originate mortgages and sell them, and this platform needs
to be designed in such a way that we ensure that kind of access
for small and mid-sized institutions.
Mr. Meeks. Do you think that will exclude the large ones,
those that have really caused these crises, in my estimation,
from also trying to take advantage of it?
Mr. DeMarco. I am not looking to exclude large institutions
from the marketplace. I am looking to make this marketplace as
competitive and transparent as we can make it.
Mr. Meeks. And let me ask, because on another issue--let me
ask this question first--I want to make sure that I understand.
We had a hearing here not too long ago, and the title of the
hearing was, ``Fannie Mae and Freddie Mac: How Government
Housing Policy Failed Homeowners and Led to the Financial
Crisis.'' What do you think? Did Fannie and Freddie cause the
financial crisis?
Mr. DeMarco. It is hard to say that Fannie and Freddie have
drawn over $100 billion to the American taxpayer and didn't
have anything to do with this crisis, so certainly the business
decisions of these companies in the years leading up to
conservatorship contributed to the housing crisis and the
economic crisis we had here. There were a lot of factors at
play and honestly, Congressman, I am not one to sign up for a
single explanation for what caused this crisis.
There are so many parties that have a share in the blame
here, from regulators, to Fannie and Freddie, to investors, to
big financial institutions, to borrowers. There is fraud out
there. There are a lot of contributing factors to what went
wrong in this marketplace.
Mr. Meeks. And let me also, because I know that you are
suing some major banks for mortgage-backed securities that
originated with triple-A ratings that Freddie and Fannie
bought. Can you tell me why that lawsuit was brought?
Mr. DeMarco. It is consistent with how FHFA has understood
its conservatorship mandate to conserve and preserve the assets
of the company. If there are losses being absorbed by Fannie
Mae and Freddie Mac that by contractual or legal rights should
be absorbed by some other party, or be the responsibility of
another party, we are looking, with these companies in
conservatorship, to exercise those rights and to get that
compensation on the losses Fannie and Freddie have had.
So we see that with regard to the representation and
warranty put-back claims that Fannie Mae and Freddie Mac have
made. And with regard to private label securities, we felt
confident that we had grounds to say that some of these
securities sold to Fannie Mae and Freddie Mac were
misrepresented in terms of what was there and that, after
seeking other remedies, we resorted to the system that is in
place to resolve these sorts of business disputes. We have
resorted to the court system to set forth our claim and to seek
appropriate compensation for these losses, and that is part of
our responsibility to protect the American taxpayer.
Mr. Meeks. I don't think I am going to have much time left,
so I will yield back.
Chairman Hensarling. That is an accurate observation on the
gentleman's part.
The Chair now recognizes the gentleman from California, Mr.
Campbell, for 5 minutes.
Mr. Campbell. Thank you, Mr. Chairman.
And thank you, Director DeMarco.
I am going to follow up on some themes we have kind of
touched on already, but dig a little deeper into them. You have
mentioned that it will take several years to do GSE reform and
to transition to a new and different system. What if we don't
get started? In other words, what are the costs or risks of
inaction, of simply just leaving the GSEs as they are, well
enough alone?
Mr. DeMarco. There are several. First, certainly to the
extent that the ongoing role of the GSEs crowds out market
participants or makes it harder for them to compete, they are
going to go deploy their capital someplace else. Then, if you
want to draw them back in, you just make it that much harder.
Second, I have testified before this committee numerous
times about the challenge of having two large companies like
this in conservatorship. The two critical foundations of these
companies are the people who work there and the basic
infrastructures that support their operations. And we have been
asking the employees of Fannie Mae and Freddie Mac for 4\1/2\
years to continue working at these companies under this kind of
scrutiny and criticism and at reduced pay, and we have told
them, ``We don't know what is going to happen to you. The
Administration keeps saying we are going to wind you down. All
of these legislative proposals are that we are not going back
to that business model. We can't tell you where we are going,
but we want you to stay and keep working here.'' These
individuals, they have careers for themselves and they have
choices, and so I think that we certainly have risk with that
kind of uncertainty.
And then another risk that I spoke of earlier is, we need
to continue to invest in the infrastructure. Every day we buy a
new 30-year mortgage, that is a 30-year commitment that the
American taxpayers made, and I have to have a technology
infrastructure and an operating infrastructure to be able to
manage that risk over its entire lifespan, and that is quite a
long tale already. I have to invest taxpayer dollars to keep
that sound, so this is another reason why I think we should get
going.
Mr. Campbell. Looking at the g-fees, we mentioned there is
a subsidy there; they are not equivalent to what--as you
mentioned in your answer to Mr. McHenry's question, something
that might bring private capital back would be a g-fee that
would be equivalent to what the private sector deemed was the
risk. If you look at the g-fees we have now--and I understand
some of those have been diverted and are going to general
government purposes that are unrelated to housing, or Fannie
and Freddie, or FHFA, or anything--but if you look at the total
amount of the g-fees, how close are we to what would be a
market, for lack of a better term, rate or the kind of rate
that would make private capital look and say, ``Maybe I would
take that risk for that price?''
Mr. DeMarco. I have certainly heard from some market
analysts who think that we are getting close. We have gone
from--my testimony says that we have basically doubled the
average g-fee pre-conservatorship from 25 to 50, and so I think
that we are within striking distance of certainly getting there
with regard to at least some portion of the credit risk.
One of the things that is important about the contract
element of our strategic plan and what we want to do with these
risk-sharing, since that is actually going to give us some
actual market observation of what the market is pricing this
risk at, and that would make me better-informed to be able to
answer a question--
Mr. Campbell. And it will do that how? How is that going to
provide that information?
Mr. DeMarco. What we are going to do is we are going to
sell off some portion of the credit exposure on these mortgages
and so the investor in the entity taking on that risk is going
to want a return on it, and so through that price we will be
able to start to discern how they are assessing the market
price of this risk.
Mr. Campbell. Okay. Other than the g-fees, what else would
attract private capital? What else can we do to start to bring
in, crowd in, however you want to call it, private capital back
into taking some additional risk in this sector?
Mr. DeMarco. One thing that hasn't come up here but
certainly is on the minds of market participants has to do with
the conforming loan limits. Conforming loan limits is something
the Congress of the United States has legislated on a number of
times since conservatorship, but the last act by Congress
actually was to see a substantial reduction in the Fannie Mae-
Freddie Mac conforming loan limit in high-cost areas. In early
2012, it went from basically $730,000 to $625,000, and the
market is still operating. I think that there is room here for,
again, as with everything else we are doing--g-fees and so
forth--a gradual drawing in of conforming loan limits is
another way to start attracting capital back.
Mr. Campbell. Thank you.
I yield back.
Chairman Hensarling. The gentleman yields back.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
And thank you, Mr. DeMarco, for being here.
Mr. DeMarco, I don't know how I feel about your new
approach but I want to congratulate you for having the courage
to do it. Honestly, it has kind of surprised me that in the
last Congress and this Congress, we have not yet had a single
hearing on what we are going to do with the GSEs moving
forward. There are several proposals on the table, and they are
all worthy of debate, but thus far we have been--I know I
personally have reached out to a lot of people trying to figure
out what we should do and where we should go, but thus far, to
my knowledge, we have had no formalized discussion.
My hope is that your proposal--good, bad, or indifferent--
will prompt us into at least having an adult conversation about
where we want to go. So I will watch it closely and maybe at a
later time, we will have a more in-depth debate as to whether
it is good or not. But as of today, I just want to congratulate
you for having the courage to take some action.
Mr. DeMarco. Thank you, sir.
Mr. Capuano. As far as the principal writedown, look, I
fall on the other side of the issue than you do. We can sit
here for the next 5 minutes and rehash it but that is not going
to help.
I suspect that what you said earlier--I accept it, that you
feel the pain of the people who are kind of caught in this
vortex. And for me, the people that I have felt the most
difficult for, at least lately, for a while now, are the people
who are struggling to meet their mortgage regardless of
principal writedown.
I have remortgaged my house 100 times and it is all about
cash flow. It is nothing else other than, can I afford it? How
much do I save? How much do I have to cost each month?
Cash flow is the most important thing that any homeowner
is--at least the average homeowner, anyway. And the cash flow
can be affected lots of different ways. Principal writedown is
one way, and it is a good way by some standards, and that is
fine.
The other way is to extend the term or reduce the rates.
The problem with a lot of these people is that they cannot take
current benefits of reduced, like I just did by rewriting my
mortgage, because they are underwater, because they might have
missed a couple of payments. Again, and I want to distinguish
that group of people from people who haven't paid anything for
the last 10 years; it is a different group.
But there are an awful lot of people who are struggling
who, maybe if their mortgage was $200, $300, or $400 less per
month, they could make it. Has there been any consideration to
coming with a 40-year mortgage or a 50-year mortgage if you
don't want to write down principal and allowing these people,
temporarily as a one-time thing, to get into these lower rates
so that they can get their homeownership back, their life back,
their control of their life back, and so you can get off the
hot seat for not doing enough for people with whom we are
concerned? Have you given any consideration to other
alternatives?
Mr. DeMarco. Absolutely, Congressman, and I appreciate an
opportunity to provide that information to you.
When we looked at the HAMP principal forgiveness, that was
an approach within HAMP, but it still focused on getting the
borrower to a monthly payment of 31 percent of the household's
monthly income. The loan modifications we are doing at least
get the borrower to 31 percent because HAMP is the first thing
we are doing. Fannie and Freddie have done more HAMP refis than
anybody.
So to your point, we are lowering the interest rate, we are
extending the term to 40 years, we are forebearing on
principal. We are taking the underwater portion of principal
and setting it aside and charging a zero rate of interest on
it. And all these things we are doing to do exactly what you
just laid out, which is to enable the household's cash flow to
be able to support the mortgage.
We have gone beyond HAMP. Fannie and Freddie have developed
modification tools that will result in an even lower monthly
payment than HAMP would for many of our borrowers. The Treasury
Department liked it so much that they adopted it themselves
over a year ago as what they call HAMP 2. It is now part of
their program because they saw how it was working for us.
But it does the very things that you have said,
Congressman, about trying to get the borrower's monthly payment
down. If they want to stay in that house, we want to give them
every opportunity to do that.
One other thing is, with respect to refinances, we have
touched lightly on the HARP program during the hearing, and
that is enabling underwater borrowers to be able to refinance
their mortgage. But I can only do that for mortgages Fannie Mae
and Freddie Mac already own. And we have seen great success
with this program.
If I may, there was one thing in my written statement that
hasn't come up at this hearing but I would like to make sure
the Members are aware of it. We are very pleased with the
success of the HARP program and we are getting prepared to
undertake a marketing campaign to further reach out to let
borrowers know, this is a legitimate program and this program
really can help you, because as much success as we have had
with it, we want to see more borrowers refinance to take
advantage of it.
Mr. Capuano. Mr. DeMarco, I appreciate all that. I, for
one, would love to see some more detailed statistics on that,
because to be perfectly honest, when people come into my office
foyer who can't access the program or they don't know about it,
and if I can help that in any way, I like the idea of reaching
out to people, but any detailed information about what you just
said would be very helpful to--
Mr. DeMarco. I will make sure our office gets that to you,
Mr. Capuano.
Mr. Capuano. Thank you.
Mr. DeMarco. I would really like to see this work.
Chairman Hensarling. The Chair now recognizes the gentleman
from North Carolina, Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman.
Mr. DeMarco, thank you for your very capable service and
your thoughtful presentation today.
You recently noted that the Administration's failure to
provide a detailed plan on how to wind down the GSEs has made
it harder to support the housing market and stabilize Fannie
and Freddie. Given that the Administration has not provided
leadership on winding down the GSEs, what steps have you taken
as FHFA Director to prepare the GSEs for a post-conservatorship
housing market? Is there more that can be done or does winding
down the GSEs require some guidance from the Administration?
Mr. DeMarco. Ultimately, bringing the conservatorships to
an end, which is the ultimate wind-down, is going to require
action by the Congress of the United States. In the meantime,
we are taking steps to gradually contract the Enterprises'
footprint in the marketplace: we are raising guarantee fees; we
are now starting to sell single-family mortgage credit risk; we
are shrinking the overall size of their multi-family book; and
we are selling assets at an accelerated rate.
I will say about the Administration--I obviously have an
important relationship with the Administration. The Treasury
Department is the senior shareholder of Fannie and Freddie. I
consult with them a lot on these things and I believe the
Administration needs to speak to itself with regard to the
specifics of what I have laid out, but I believe I have a good
relationship with the Administration in talking through these
issues and in indicating to them the direction that, as
conservator and regulator, I believe it is useful to go, and I
benefit from the feedback I get from them.
Mr. Pittenger. So you feel that you have been adequately
directed?
Mr. DeMarco. I feel like I have a good working relationship
and good consultation and I know where we agree and where we
disagree. I would say what I need most to bring these
conservatorships to an end is I need both the Congress and the
Administration to agree on a legislative path that defines the
role of the government in the mortgage market going forward so
that we can know where we are actually building towards as we
build for the future.
Mr. Pittenger. Thank you.
I yield back my time.
Mr. DeMarco. Thank you, Congressman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you very much.
And welcome, Mr. DeMarco.
Mr. DeMarco, with home sales and pricing--prices of homes
increasing and mortgage spreads back at normal levels, why do
Fannie and Freddie continue to assess an adverse market
delivery charge that took in nearly $3 billion in 2012? Aren't
these actually fees which are no longer needed and is
effectively a tax on new homebuyers?
Mr. DeMarco. I wouldn't say it is a tax on new homebuyers,
Congressman, but I would say that we were--on the one hand, as
I have made clear, we are on a path of continually raising the
g-fees. You are talking about a component piece of the g-fees
that was put in place when the mortgage markets were in
distress.
I will say that as part of our valuation of the next steps
for increasing g-fees, we are looking at the composition of g-
fees, including adverse market fees and so forth. So I am
assessing what you are talking about but I want to be clear
that the overall path we are on is to continue to increase g-
fees.
Mr. Scott. All right.
Let me ask you about loan level price adjustments, as well.
Loan level price adjustments of as much as 3 percentage points
make Fannie and Freddie execution uncompetitive relative to the
FHA, and reducing these fees would make higher LTV loans with a
private M.I. more competitive. Do you agree that these LLPAs
are distracting the market and hampering the return of private
capital?
Mr. DeMarco. No. I think the more we raise the overall g-
fees, the more we are going to encourage private capital back
into this marketplace.
Mr. Scott. All right.
Now, with the Administration's intent on winding down
Fannie and Freddie, is it your sincere and honest belief that
the private market, in and of itself, will be able to absorb
this void, especially considering, Mr. DeMarco, that 90
percent--this is a huge void--90 percent of all of the new
mortgages were done by Freddie and Fannie? And it is just
baffling to me that--I just am not satisfied that we have
something that can take the place of that.
Mr. DeMarco. Congressman, here is how I think about it: The
short answer to your question, but I want to make sure I frame
the question right, can the government step entirely out of
this marketplace and can this single-family mortgage market be
supported without any government involvement, and is that what
I would like to see? That is not what I anticipate and it is
not really what I am expecting or would like to see.
But I would frame it this way: The single-family mortgage
market in the United States is a $10 trillion market, and I
don't expect the outcome to be that all $10 trillion is done by
private capital without government involvement nor am I
expecting all $10 trillion to be done by the government without
capital. That dial--if you think about a dial on that range--
has moved well towards the government having most of the
responsibility of this mortgage market, and that dial has moved
in the last 5 years.
What I would envision is we have to start moving that dial
away from government and away from taxpayers and back towards
more private capital participation. But my gosh, between zero
and $10 trillion there are a lot of places to put that--to
reset that dial, and I think that we can make substantial
progress away from taxpayers and still have a vibrant role for
government.
And I have suggested elsewhere that in thinking about where
that government role ought to be, it might be constructive for
Congress to begin with the traditional, explicit government
guarantee programs, such as the FHA program and the VA program,
because those are existing programs to provide guarantees, and
let's figure out where Congress intends them to serve the
market and then one can think about, well, what is left and
what does the government need to do to support the rest?
Mr. Scott. But doesn't it make sense that we ought to
figure out exactly what government's role should be? If you
agree that government has the role here and it does, how do we
figure out how to make that work? How do we guarantee that the
30-year fixed mortgage will stay in place and available as an
option to that without the government role?
Chairman Hensarling. The time of the gentleman has expired.
The witness can answer in writing.
The Chair now recognizes the gentleman from Ohio, Mr.
Stivers, for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
Thank you, Mr. DeMarco, for being here today. I want to
first recognize and congratulate you for the 2012 strategic
plan, the three-point plan that you have undertaken, and I
think we all agree that is the direction we need to go: first,
to build a new infrastructure for secondary markets; second, to
eventually contract the GSEs' dominance; and finally, to
maintain the foreclosure prevention activities and credit
availability that the American public require.
And I want to ask around those three things some questions.
First, on building the new infrastructure--and I know Mr.
Capuano asked a little bit about this--do you know what--this
is sort of a two-part question--timing you have for developing
a single security, because right now there are changes on a
monthly basis that some of the servicers are having to deal
with, and is that single platform that you are envisioning--are
you trying to use that as a foundation or a building block for
the reformed housing finance system going forward?
Mr. DeMarco. The answer to your second question is yes, I
do think that this could serve as a building block for Congress
to utilize in envisioning a future secondary mortgage market.
The answer to the first question about how long, we
announced 13 months ago that it was our intention to work with
Fannie and Freddie to develop this platform so we made that
clear to the Congress and the public. In October of last year,
we issued a White Paper in which we described for the market
the potential scope of this platform and how it would actually
operate and we solicited public input on this.
We have been considering that input in going about the next
phase of the design of the platform. We expect to continue to
reach out to market participants in a formal way to be able to
continue to get market input.
But overall, end to end, this is a multi-year project.
Mr. Stivers. Great. Thank you. And I want to thank you for
that work, and I think we can potentially use that as a basis
for our system moving forward.
I will ask you a rhetorical question that I don't think you
are going to answer but I am going to ask anyway: Once that is
complete, do we really need two GSEs? I am not going to ask you
to answer that, but that is a rhetorical question.
I would like to ask you some questions with regard to the
system moving forward and how it pertains to regional banks and
community banks. Do you believe it is important to maintain a
competitive market in mortgage origination, secondary, and
servicing markets--
Mr. DeMarco. Absolutely.
Mr. Stivers. Do you think that--do you believe that these
markets are more or less competitive than they were 5 years ago
today?
Mr. DeMarco. Interestingly, in some ways, they are perhaps
getting a bit more competitive. Some of the largest
institutions have actually stepped back a little bit.
Mr. Stivers. And do you believe that concentration in those
markets--additional concentration of market share in those
markets--would be a good thing or a bad thing going forward?
Mr. DeMarco. I am not a big fan of concentration in our
financial system, and that is why the more we can do to keep
this competitive and to keep an active role for small and mid-
sized players, the better.
Mr. Stivers. I agree with you, and I think that is what has
led to some of the too-big-to-fail, and so I guess I would ask,
what steps do you take or what analysis do you perform in
making changes to the GSEs and market rules to ensure that
those changes won't disproportionately affect regional banks or
community banks and otherwise lead to more consolidation or
concentration market share?
Mr. DeMarco. I think it is critically important that we
develop standards that define how the mortgage market works.
Just as one very quick thing--if you used to sell a
mortgage to Fannie Mae or Freddie Mac and you are a local bank
and you sell one loan to Fannie Mae you had to provide a whole
bunch of proprietary coding regarding the characteristics of
that mortgage. If you were to take that mortgage and say, ``No,
wait, I want to sell it to Freddie,'' you would have to provide
all that information in an entirely different system with
different data definitions, and so forth.
That was particularly costly for our small and mid-sized
institutions. It also degraded the quality of the data that
each company was getting. That is why I think that data
standards are important and will really help smaller
institutions compete.
Mr. Stivers. Thank you.
And I would just like to thank you for what you are doing.
I hope we can all work together on this committee and with the
Senate and with the Administration, because I think every day
we wait to reform the GSEs is another day that the taxpayers
are on the hook for more potential losses.
I want to thank you for the way you have run your
conservatorship, and I look forward to working with you in the
future.
With that, I yield back.
Mr. DeMarco. Thank you, Congressman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the ranking member, as well.
Mr. DeMarco, some things bear repeating. You have indicated
to Mr. Scott--and I may be paraphrasing--that you believe there
is a role for the public sector in home mortgage financing. Is
this correct?
Mr. DeMarco. I do, Congressman.
Mr. Green. That then means, sir, that you are now in
agreement with the builders that I talk to, the bankers that I
talk to, the REALTORS that I talk to. I think that this is a
fair assessment when I say that most of the people who are
involved in this process that I talk to see a public as well as
a private role in mortgage financing. Is this a fair statement?
Mr. DeMarco. It is. And to be clear and elaborate on it, I
think that--
Mr. Green. Let me do this, because my time is limited, and
I will try to give you some time to elaborate, but I do want to
add this, that because you and I agree that there is a role for
the public sector, it also means that you and I disagree with
people who say that there is only a role for the private
sector. You and I have to assume that this is a fair statement,
true?
Mr. DeMarco, listen, you and I are going to have to agree
or disagree, and right now you and I seem to be in agreement.
Mr. DeMarco. We are, Congressman.
Mr. Green. All right. That is what I am talking about, Mr.
DeMarco--our agreement.
Mr. DeMarco, that makes news for me because prior to this
hearing, I was not absolutely sure where you were, and I
appreciate your being absolutely certain as to where you are.
Now, moving along quickly, Mr. DeMarco, you indicated that
you support the HARP program. Is that correct?
Mr. DeMarco. Yes, sir.
Mr. Green. That is a refi program.
Mr. DeMarco. Yes, sir, it is.
Mr. Green. And, Mr. DeMarco, if you support it tell me, how
are you working to make sure that persons who are under the
purview of the GSEs can benefit from your support?
Mr. DeMarco. We have continually looked at the performance
of this program and made changes to make this more accessible
to borrowers around the country. And I think that the numbers
in 2012 speak for themselves, but importantly, we are not done.
As I said a little bit earlier, we are intending to undertake a
marketing campaign in the near future to make citizens more
aware of this program and the potential benefits--
Mr. Green. Permit me to ask this: Is there something that
prevents you from creating an automated process by which you
can send notices to persons who are financed through the GSEs--
you hold their mortgages--sending them a notice indicating to
them that they may be eligible for this program?
Mr. DeMarco. That is being done, Congressman. It is done by
their mortgage servicer.
Mr. Green. By the mortgage servicer?
Mr. DeMarco. Yes, sir.
Mr. Green. Would it in any way be too much--be done to an
extent that we would conclude that we had done more than we
should for you to do this with the portfolio that you have?
Mr. DeMarco. I think we are doing quite a lot here with it
and I am not sure what you are driving at but I--
Mr. Green. I will tell you what I am driving at with 1
minute and 35 seconds left. We have a lot of people, Mr.
DeMarco, who can pay a lower mortgage payment and keep their
homes.
Mr. DeMarco. Yes, sir.
Mr. Green. Many of them may lose their homes. I think that
we can do more to make them aware of the refi program that you
have talked about, and I think that coming from you and your
august position, this would mean something to them. So I am
going to ask that you consider doing something by way of a
notice.
Mr. DeMarco. Okay. I have already committed that we are
going to undertake a public marketing campaign and we are going
to--
Mr. Green. Does public marketing mean notice? Public
marketing--
Mr. DeMarco. That means we want to--
Mr. Green. --is a nebulous term.
Mr. DeMarco. We want to improve general public awareness
and we also want to reach out directly in those communities
where--
Mr. Green. So I am going to have to take, Mr. DeMarco, from
your testimony that you are not saying you will send a notice?
Mr. DeMarco. I am sorry, Congressman, I already said that
we are--we have been sending notices directly to borrowers
about this.
Mr. Green. You have?
Mr. DeMarco. Yes, sir.
Mr. Green. Then I misunderstood you, and I owe you an
apology for the misunderstanding.
Mr. DeMarco. That is fine. I am sorry for the confusion.
Mr. Green. Mr. DeMarco, I like you--
Mr. DeMarco. Thank you.
Mr. Green. --and I want to make sure we understand each
other.
Now let me move quickly to the National Affordable Housing
Trust Fund. Do you believe that such a fund should exist, Mr.
DeMarco, that we should have a fund to help us maintain our
affordable housing stock?
Mr. DeMarco. Congressman, that really is outside the
bailiwick of my responsibility as regulator and conservator.
That is a policy decision for the Congress. I really am not--I
didn't come here prepared to have an opinion about the trust
fund.
Mr. Green. I will accept your answer, Mr. DeMarco. Thank
you.
Mr. DeMarco. Thank you, sir.
Mr. Garrett [presiding]. The gentleman's time has expired,
and we appreciate the comity between the two gentlemen and all
the areas in which they found common ground.
And with that, we turn now to the gentleman from Virginia,
Mr. Hurt.
Mr. Hurt. Thank you, Mr. Chairman.
And thank you, Mr. DeMarco, for your candor and for your
leadership.
After many long years, the GSEs are beginning to turn a
profit, and I guess I would like to hear from you, what are the
advantages and disadvantages of their return to profitability
for you, as conservator? And what should we--has it led to any
changes in tactics to accomplish this reform on your part, and
what are things that perhaps we would be wise to be looking out
for with this positive turn of events but also recognizing that
we really do need fundamental reform and the taxpayers have
ponied up north of $180 billion?
Mr. DeMarco. It is hard to see any negative to Fannie Mae
and Freddie Mac starting to show a profit since that is what we
have been working towards all along. So I think that is
certainly good news.
One of the key drivers here is house prices. That has a
huge impact on the profitability of Fannie Mae and Freddie Mac,
so it is an indication that the country's housing markets
really are starting to stabilize and show some sign of
recovery--also a very positive thing.
And the fact that they are making money now gives us more
flexibility to undertake these important steps of selling off
some portion of the credit risk. It gives us the opportunity
and the resources to do things like invest in building this
platform. And because we have worked through a good bit of the
legacy we can start to free up resources to these future-
looking goals that we have.
Mr. Hurt. Are there any disadvantages that you can think
of?
Mr. DeMarco. I can't think of any disadvantages to them
earning money.
Mr. Hurt. Okay.
In your speech that you gave on March 4th at the National
Association of Business Economics, you stated that one of the
effects of the housing crisis has been a shift in consumer
demand patterns away from home purchases towards renting, and I
was wondering if you would comment on your view as to whether
or not this shift is a rational phenomenon of consumers and
investors adjusting to new market realities versus a
normalization of demand as the distortions of an over-
subsidized government mortgage market are reduced?
Mr. DeMarco. I would expect it has elements of both,
Congressman.
Mr. Hurt. It has what?
Mr. DeMarco. It has elements of both. Households have
reassessed at the margin how they want to manage their balance
sheets, what the risks are of being a homeowner, and so that
has certainly come into play, the weakness of the economy, and
even for those who are still employed, if they have a lack of
certainty, if they fear that their job could be at risk or
their hours could be at risk, that is going to make them less
likely to want to buy a home at this time.
So these are all contributing factors and I think there is
perhaps a natural readjustment. We had reached a homeownership
rate above what we had ever seen before, and if that is above
some concept of a natural rate then one might expect to see a
modest decline in it.
Mr. Hurt. Thank you. I yield back the balance of my time.
Mr. DeMarco. Thank you.
Mr. Garrett. The gentleman yields back.
Mr. Cleaver is now recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
And thank you, Ms. Waters.
Mr. DeMarco, do you see anything wrong with the mortgage-
backed securities actually guaranteeing a return, which is
essentially what happens now? Unlike anything else you--if you
go to Ginnie Mae, it is 100 percent guaranteed.
Mr. DeMarco. Right.
Mr. Cleaver. Do you see anything wrong with someone doing
an MBS and saying, I know I am going to get my money because it
is guaranteed by the Federal Government?
Go ahead?
Mr. DeMarco. I do, Congressman. I think that the basic risk
of the taxpayer guaranteeing most or all of the mortgages in
this country is that you are relying on civil servants. As
loyal as we are and as hardworking as we are, you are relying
on government agents to interpret and study and follow mortgage
credit risk and to be able to, from time to time, make
adjustments in pricing due to that rather than relying on
market participants who actually have their own money to lose
having to make that continually informed judgment about what
mortgage credit risk actually looks like.
So while I think--as I said in my conversation with Mr.
Green--there is clearly a role for government, there is also
clearly a role for the private sector, for people who have
their own money at risk to be able to assess this risk and help
price it in the marketplace. That is not a job for government
alone.
Mr. Cleaver. But reform is probably needed, but you would
agree, I think, that any reform would be massive and messy. And
the charter allows for the GSEs to do the mortgage-backed
securities and so to undo it creates a problem, and for me, it
has always seemed a bit unsavory.
But at the same time, I don't think we can do--I agree with
you and Mr. Green that we absolutely must have the secondary
mortgage market. So I don't know how we fashion this.
Mr. DeMarco. If I may, I may have an explanation about what
we are doing that might help both of us here--help all of us,
really. Let me try to explain in a slightly different way what
we are doing with this contract strategically.
What I want to do with mortgages that are being sold to
Fannie and Freddie now--rather than Fannie and Freddie and
hence the American taxpayer being the only source of guarantee,
I want to take some portion and say to market participants,
``Here, we will do a trade, right? I am going to sell you this
risk, right, and you are going to get a return for being
willing to bear this risk.''
So now I get the benefit of your private equity backing
this and I get the benefit of your perception of what this risk
actually looks like rather than just relying on my agency to do
that. And so what we get is a market price, market signals
about this risk, and we are now in a shared risk environment.
What we are doing in 2013 is I have instructed Fannie and
Freddie to undertake multiple types of transactions--there are
different ways of selling off pieces of this credit risk--so
that we can see what kind of execution we get in the
marketplace, how the marketplace is pricing it so that we get a
better sense of, then, all right, if this starts to look like
there is good demand for this we can then start to proceed
gradually to see, okay, how much more can we sell, how much
more will they buy, and how are they continuing to address this
risk? And I think that is the way we keep this from being big
and messy but we make it orderly and gradual; we do it in a
resolute way to bring private capital back to the market.
Mr. Cleaver. Have you written anything on that?
Mr. DeMarco. Pardon?
Mr. Cleaver. Have you written anything on that?
Mr. DeMarco. We have a couple of documents. I would be
happy to share them with you, Congressman, and I would be happy
to come up and go over them in more depth than our 5 minutes
here allows.
Mr. Cleaver. Yes. I would appreciate that very much.
I yield back the balance of my time.
Mr. Garrett. The gentleman yields back.
Mr. Hultgren of Illinois for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you so much for being here today, Mr. DeMarco. I
appreciate your time and information.
Mr. DeMarco, as has been noted, currently over 90 percent
of new mortgage originations are supported by the Federal
Government through either the GSEs or FHA, while the GSEs
either own or guarantee about 61 percent of all new residential
mortgage loans made in the United States. If the development of
a sustainable housing finance system based on private capital
is to be successful, what issues should policymakers consider
regarding the appropriate role of the FHA and the GSEs moving
forward, and how can we prevent leakage from the wind-down of
GSEs from driving business to FHA and expanding taxpayer
liability?
Mr. DeMarco. With regard to FHA, while obviously this is
not a program that I am responsible for I would, in response to
your question, offer a few observations. First, Congress could
give FHA greater clarity with what Congress expects FHA's
targeted market to be. Is this to serve first-time homebuyers?
Is it based on certain communities? Is this really meant to
help people get into their starter home, their first home, and
then after that, you are expected to go to the conventional
market or not?
But giving FHA--right now the only real sort of parameter
or limit is the loan limit that FHA operates under, so that is
one way Congress could express some guidance to the role of
FHA. There are things that could be done with FHA to give it
greater flexibility in terms of pricing risk and being able to
resource itself as an agency to carry out a mandate.
In other places, we set up these sorts of guarantee
functions as independent, government-owned corporations, and
give them more flexibility in terms of how they manage their
business, what resources, greater flexibility in the human
capital, the people they hire to do the job, and greater
flexibility with regard to pricing. These are all things that
Congress could consider in the context of FHA's role in the
marketplace going forward.
Mr. Hultgren. Switching gears just a little bit, I wonder
if you could talk a little bit about how you think increasing
g-fees will affect the FHA. Will increasing g-fees push
business to FHA? Will there be more explicit government
guarantees there? How do you see this all playing out?
Mr. DeMarco. FHA and FHFA certainly keep an eye on what the
other's g-fees are. We have both been gradually increasing g-
fees in the marketplace.
Another critical component here that shouldn't be lost is
it is not just Fannie and Freddie's g-fees that matter in this
matrix, but it is also the mortgage insurance premium that
private mortgage insurance companies are assessing for this
risk. That is also an important price element when one is
looking at the decision of a borrower to go FHA or go
conventional.
But we are well-aware that increasing our g-fees, with
everything else being constant, could tend at the margin to
move this risk over to FHA. But the point is, whether it is
Fannie and Freddie buying the mortgage or FHA buying the
mortgage, we all should be operating with appropriate risk-
based pricing mechanisms so that we undertake this business in
a way in which we are adequately pricing for the risk that we
are undertaking.
Mr. Hultgren. Thank you.
I know time is limited, and to get to as many people as we
can, I will yield back the balance of my time. Thank you, Mr.
Chairman.
Mr. Garrett. The gentleman yields back.
Mr. Ellison is recognized for 5 minutes.
Mr. Ellison. Thank you, Mr. Chairman and Ranking Member
Waters. I appreciate you calling this hearing.
Mr. DeMarco, I just want to acknowledge that you did
acknowledge the pain that millions of families have gone
through. I think it is important for you to note that, because
as we are having this very civil conversation, the reality that
people are going through--not just individual families but
whole neighborhoods.
Mr. DeMarco. Yes, sir. Absolutely.
Mr. Ellison. Let me ask you this: Now, Fannie and Freddie
are making some profit. A few years ago, we passed a bill
establishing the National Housing Trust Fund and the law said
that the proceeds would fund the National Housing Trust Fund,
which would help low-income families. Now, in my own district
of Minneapolis, we have an occupancy rate of like 98 percent
and we could really use the help that a National Housing Trust
Fund for low-income rental housing could provide.
When do you see the GSEs complying with the law that would
fund the trust fund, or do you?
Mr. DeMarco. I would say we have been complying with the
law from the beginning because the law clearly indicated that
FHFA could make determinations based upon the financial
condition of the companies not to contribute money to the
funds, and that has been our ongoing determination.
Mr. Ellison. Do you see that changing? What is the future
of funding the National Housing Trust Fund, given the
profitability?
Mr. DeMarco. First of all, I want to make sure this
profitability is sustainable, Congressman, and I am still
mindful of the monies that erode to the Treasury Department and
that frankly these funds, if they don't go to the trust fund,
are going back to the taxpayer, and I have not thought about
this recently so I would want to give your question a little
bit more careful consideration.
Mr. Ellison. I appreciate that. And proceeds can go in
different directions--some to pay back the taxpayer, some to
fund the Housing Trust Fund. I appreciate you thinking about
that.
I have talked to people about these difficulties, as
everybody on this committee has and you have, and one of the
things that I would like to get your feedback on is the
situation in which somebody perhaps can't pay their mortgage,
they will maybe lose their home in foreclosure, and then maybe
it will be sold back at market rate, which then, at least to my
understanding, the previous occupant is not allowed to bid on.
Are you familiar with this situation?
Mr. DeMarco. I am. That would be--
Mr. Ellison. Could you speak to this?
Mr. DeMarco. That would be considered an unsafe and unsound
practice to engage in that sort of activity, because then you
are not actually doing things at arm's length.
Mr. Ellison. What if you were to just treat the person as
an arms-length person, just look at their new financial
situation, look at their ability to pay now? Because as has
been said by many, many people fall into foreclosure because of
the market, because of a medical problem.
Will you at least look at these cases on a case-by-case
basis? Because it seems like there is a blanket denial.
Mr. DeMarco. I think I would like to do better than that,
Congressman. I think that where we have gotten to is this: A
family gets in trouble on their mortgage, we now have processes
and requirements in place for the servicer to be reaching out
to that family from day one and there is a whole menu of
options to help that family that are tailored to what the
potential circumstances might be that have caused them to get
into trouble.
Is it a temporary issue regarding a medical condition where
the person is out of work for a few months? Is it unemployment?
Is it a permanent reduction in income for that household?
For each of those types of situations, we have tailored
responses, but what we have done much better on now is when
this happens today, the servicers know what to do and they are
supposed to be in contact with that borrower right away. I
don't want that borrower getting 90 or 120 days behind on their
mortgage before they have actually been working with the
servicer and have been offered the kind of assistance that you
are talking about.
Because fundamentally, Congressman, the way we are going to
most help people is to get them right away. When they first get
into trouble, we want to be reaching out to them. And frankly,
we want them reaching out to us.
This menu of opportunities here, including significant
reduction in their mortgage payment, are now well-established.
We have these systems in place now and I really want to be able
to help people now.
Mr. Ellison. We are getting to the yellow light, Mr.
DeMarco, so I am going to try to get my question in. I might
have to take the answer in writing.
Okay, so you have indicated that the FHFA's first goal is
to build a new infrastructure for the--
Mr. Garrett. I am going to ask the gentleman to submit his
question in writing. We have an agreement with the witness and
also the ranking member that all Members who are in the room
right now will get their questions in, and then Mr. DeMarco
will be excused a little past the time that he has agreed upon.
Mr. DeMarco. Very good. Thank you, Mr. Chairman.
Mr. Garrett. So we will go now to Mr. Mulvaney.
And I will be strict on the time for each person.
Mr. Mulvaney. Thank you, Mr. Chairman.
Mr. DeMarco, thank you for being here today. I want to talk
a little bit about your strategic plan, which you have laid out
in your testimony as having three basic pieces: the concept of
building this new infrastructure; contracting part of the
business; and maintaining other parts of the business.
And I want to focus on this concept of contracting, because
when I look at the details on contracting part of the business
I see some discussion--I want to talk specifically now about
single-family. I see some discussion about raising fees, some
discussion about entering into these risk-sharing transactions,
but it is not until I move to the multi-family part that I see
specific targets in terms of percentage reductions, and I think
you said a 10 percent goal this year for shrinking the multi-
family portion of your business.
Have you set similar targets for shrinking or contracting
the single-family portion of the business?
Mr. DeMarco. No. We have not approached it that way and
there is an explanation for that, Congressman.
In the multi-family, segment Fannie Mae and Freddie Mac
today risk-share on virtually all the multi-family mortgages
that they purchase. That is, there are already established
processes and business practices whereby if Fannie Mae buys a
multi-family mortgage, they are not taking all that credit
risk; they are sharing it with the originator.
That is not the way it works in single-family. We have
another step we have to take first in single-family, and that
is establishing what these processes are to start sharing the
risk.
So my goal is in 2013, let's get those transactions tested
in the marketplace and let's get the process to do it in place,
and then in subsequent years we can look towards more like an
approach we are taking with multi-family to say, we want to see
an increase in share of this sold off.
Mr. Mulvaney. Fair enough.
And let's, to the extent we can, look down the road a
little bit as to the future when possibly you are able to start
talking about specific percentage targets for shrinking the
single-family portion of the business. How small of a market
share can you have and still provide the liquidity that you
think is necessary for the market? We go back to the early
2000s and you all were 80 percent of the market; in the mid-
2000s, you were 45 percent of the market; now you are
effectively 100 percent of the market.
How small a role can you play and still fulfill that
particular function?
Mr. DeMarco. The particular function of--
Mr. Mulvaney. Providing liquidity--
Mr. DeMarco. --providing liquidity? That certainly can be a
good bit less than 90 percent. But the point is that you are
not going to turn the switch overnight, and I think that the
way to sort of get to wherever that answer is is to do it
incrementally, and that is the path we are on.
Mr. Mulvaney. But I think it is fair to say historically at
least, that the market can function with you supplying
guarantees on less than half of--
Mr. DeMarco. Absolutely, Congressman, yes. Fannie Mae and
Freddie Mac traditionally, I believe, had less than half the
market.
Mr. Mulvaney. And that sort of transitions to my larger
question, which is, we talk about contracting the market, which
obviously folks in here may agree or disagree with, but even
when you talk about the strategic plan--all different pieces of
it, including contracting--you are still talking about
operating within the existing system, the existing regime,
which is this implicit taxpayer guarantee. And I would ask
you--and again, it may be rhetorical, Mr. DeMarco--isn't that
system broken? If your goal in doing this is to protect the
taxpayer, isn't it true you are just not going to be able to
protect the taxpayer until you get rid of the guarantee?
The only way you are going to get rid of the potential
conflicts that Mr. Ellison so eloquently laid out, which is--
look, you have three masters right now. You have the taxpayers
that you owe money to and you are also trying to protect them
from future risk; there are circumstances under which you are
asked to contribute to a Housing Trust Fund; but you have
private shareholders.
Isn't that whose system--isn't the GSE system fundamentally
flawed, and regardless of anything you do to contract it, build
it, sustain it, we are still going to have these issues in the
long run?
Mr. DeMarco. It is broken, Congressman, and I look forward
to working with the Congress to come up with a better one.
Mr. Mulvaney. Is it possible to fix it with leaving the
implicit taxpayer guarantee in place? Don't you have to either
go to a system where you all become an agency or you become a
private entity? Either one or the other, you can't be both?
Mr. DeMarco. You certainly need to clarify where the
government's role is and its exposure and where private
capital's is. The GSE model that you are talking about being
broken, that was the problem. It was a complete melding of
private capital and public support in a way that just harmed
the American--
Mr. Mulvaney. I think it is fair to say--and I appreciate
the steps you are taking to protect the taxpayer, because
clearly that is the goal of your strategic plan, but I would
put it to you--not to you, put it to the larger group that we
are always going to have this risk. Regardless of how
successful Mr. DeMarco is in contracting, building,
maintaining, whatever, until we get the taxpayer out of the
business of the guarantee, the taxpayer is always going to be
on the hook eventually.
I thank you for the work that you are doing, but I
encourage everybody else to consider the possibility that it is
the system that is broken, not the operation of the system.
Thank you.
Mr. Garrett. The gentleman yields back.
Mr. Perlmutter is recognized for 5 minutes.
Mr. Perlmutter. Thanks, Mr. Chairman.
And, Mr. DeMarco, it is good to see you.
Mr. Pollard, it is good to see you as well.
Just a couple of things. Mr. Mulvaney first brought up
multi-family housing. In the last 4 or 5 years, as we have gone
through this, I have not heard any complaints about Fannie Mae
or Freddie Mac's role in the multi-housing market as a
participant in various loans and obligations. Have you received
any complaints on the multi-family piece of this?
Mr. DeMarco. I hear lots of complaints, Congressman, so I
am sure I have heard complaints about multi-family.
Mr. Perlmutter. But that hasn't been the area of--where
there has been substantial requirement by the taxpayers to
underwrite some of these loans?
Mr. DeMarco. That is correct. We have managed to keep this
business profitable.
Mr. Perlmutter. Okay.
Second question, speaking of profitability, one of the
gentlemen--I think Mr. Hurt--brought it up that Freddie Mac has
made some money recently. Is that true?
Mr. DeMarco. Yes, sir.
Mr. Perlmutter. How much? In the last month or 2 months?
Mr. DeMarco. About $8 billion.
Mr. Perlmutter. Okay. Has Fannie Mae made any money
recently?
Mr. DeMarco. They have. They have not filed their year-end
financials but they have indicated in a filing to the SEC that
they will report positive income in 2012.
Mr. Perlmutter. I just want to congratulate you on that,
because it hadn't been going that way for a long time. And what
I thought was a really good description of the zero to $10
trillion sort of continuum, over the last few years the Federal
role has grown because there was no private involvement in the
market because they got clobbered. They got clobbered more than
Fannie Mae and Freddie Mac.
So the private sector--and I appreciate the theory, and I
agree with a lot of the theoretical statements you have made,
but the private sector didn't price it very well when they were
pricing it either back in 2005, 2006, 2007, and 2008. Wouldn't
you agree?
Mr. DeMarco. Yes. Neither GSEs nor the private sector did a
very good job pricing mortgage credit risk--
Mr. Perlmutter. Then, the private sector more or less
withdrew completely from the market, in which case there was a
vacuum--
Mr. DeMarco. That is correct.
Mr. Perlmutter. --for Fannie Mae and Freddie Mac and for
the role that you have been playing as FHFA.
Mr. DeMarco. That is correct, Congressman.
Mr. Perlmutter. I agree with you. In terms of the continuum
or the dial, as you described it, we probably are too far in
terms of the Federal involvement, but without it, there would
have been no market.
Mr. DeMarco. That is correct.
Mr. Perlmutter. So let's talk about standards. You were
talking about sort of technological platforms and standards.
One of the reasons that we all got into trouble--both the
private and the public sector--is that the underwriting
standards seemed to go out the window for several years.
Wouldn't you agree?
Mr. DeMarco. Yes, sir.
Mr. Perlmutter. So underwriting standards you all have put
back into place have led to the profitability of two of your
organizations now?
Mr. DeMarco. Yes, sir.
Mr. Perlmutter. One of the standards that I have been
worried about is sort of this technological standard, and
Senator Wyden has written a letter to the Department of Justice
concerning lender processing services, LPS. Were you involved
in any of the litigation--was Fannie Mae, Freddie Mac, or you
as the conservator involved in any of the settlements with LPS?
Mr. DeMarco. Let me verify, but I think I am pretty sure I
know the answer. I don't believe we were involved in that
particular litigation.
Mr. Perlmutter. What I would like you to do--and I would
ask your counsel, as well--is to take a look at the role of LPS
in all of this. There was one platform--a technological
platform--that was very good when things were going smoothly
but it was very hurried in terms of lawyers processing
foreclosures, and those kinds of things. And I just ask for you
all to take a look at that.
And I would be remiss if I didn't bring up REMX for you to
say that is an area where I think if you exercised those calls,
there would be additional profitability to both Fannie Mae and
Freddie Mac.
And with that, I will yield back.
Mr. DeMarco. I appreciate that, Congressman.
Mr. Garrett. The gentleman yields back.
Mr. Huizenga is recognized for 5 minutes.
Mr. Huizenga. I appreciate that your time is growing
short--2\1/2\ hours under the lights and in front of the
camera, and I appreciate that.
I do have something. We just heard about LPS. I want to
talk a little bit about lender-placed insurance (LPI). I don't
think that is something that has come up, kind of a technical,
in-the-weeds thing, but I know that there had been a push by
Fannie Mae looking at trying to basically come up with one
lender, one underwriter, one agent group. I believe you had put
the brakes on that operation or on the movement towards that.
Do you see any value in selecting these preferred vendors
versus having a free market system do that?
Mr. DeMarco. Congressman, I have concerns about the way the
lender-placed insurance market has worked. I think a lot of
people do.
What I am seeking, and we actually made it part of the
scorecard for 2013, is I am seeking to work with other
regulators and with other market participants to come up with a
market standard for how to improve the transparency and the
competition in this marketplace so that both borrowers and
investors are better protected. So what I am looking for is not
a Fannie Mae-centric approach or conclusion here. I certainly
want to help Fannie Mae. As conservator, I want to see them in
a better position with regard to LPI.
But I think we can do better than that. I think we can do
something to create a better standard for the market so whether
the borrower's mortgage is owned by Fannie Mae, Freddie Mac, or
some other market participant, if we can bring something better
to the way this market works, that is what I am aiming--
Mr. Huizenga. Okay, so I think I am hearing you say that
FHFA will--you are going to attempt to preserve a rule for
these servicers and these NVAs, and underwriters, that you will
try to put in some reasonable rules and guidelines that will be
issued but it will--
Mr. DeMarco. We want to continue to have insurance coverage
when you have a situation where either a borrower is unable to
obtain homeowner's insurance in their particular location or
the borrower defaulted on their mortgage so we don't have
insurance coverage because they are not been paying. We want to
make sure that the asset is protected but--
Mr. Huizenga. Which I think we all see. My background is in
real estate and developing, and I am very familiar with those
things, and obviously we have to protect the asset for those
who have invested heavily in it, and you just can't have it
hanging out there.
I have a couple of minutes and a couple of really quick
things. It does seem to me that we were talking a little bit
about--my friend from Colorado was talking about how there was
no marketplace for these mortgages and we needed to have Fannie
and Freddie step in. I am not sure that they needed to quite
step in as dramatically as they have; however, it does strike
me that we got in that situation because of fraud. It wasn't
because nobody was making a bad business decision based on
calculations that they--having all the information.
It seems to me they made bad business decisions because
there was a significant piece of the equation missing as they
would go in and make those calculations. Isn't that fair?
Mr. DeMarco. I would certainly add fraud to the list of
contributing factors of the housing finance crisis, but I think
plenty of bad business decisions were made even outside of the
fraud operating--
Mr. Huizenga. It seems to me that when we--not verifying
people's income and then suddenly, through a whole myriad of
systems, declaring that triple-A probably is not the best
system to do that.
On a more philosophical question, do we really need 30-year
mortgages? We have a neighbor to the north where 30-year
mortgages have not been part of their history. They may
amortize over that but then there is 1-year--sometimes even 6-
month--1-year, 5-year now; they are now just really getting
into long-term mortgages.
And I am curious if you can unpack that a little bit in the
next 45 seconds?
Mr. DeMarco. As an economist, the notion of need is--I
don't think we interpret that quite the same way as everybody
else, so it is a little hard for me to respond to a question
about, do we need.
I will make an observation about 30-year mortgage, however.
In some sense, it arose as an affordable product because
mortgages used to be--even which fixed-rate mortgages became
more commonplace, they were 15 years, and they were 20 years,
then it would be 25 years, and we kept pushing out the maturity
spectrum to make financing more affordable. And not that there
is anything wrong with that, it is that with a 30-year
mortgage, you do not really start paying down principal over
those first several years.
And one thing I would say about 30-year mortgages, it is
not necessarily the best mortgage product for a homebuyer,
especially a first-time homebuyer. If you look at statistics
and see that the first-time homebuyers in this country tend to
own their first home for 4 years or for 5 years, it may not be
the best for their circumstance if they buy that house with
that kind of timeline is what they expect, there may be a
different mortgage product in which they can build equity at a
faster rate than a 30-year fixed-rate mortgage.
Mr. Huizenga. I appreciate that. And then somebody,
obviously, at 60 years of age, maybe financing or refinancing
it for 30 years is--you are outside your potential earning
power stroke there.
So thank you. I appreciate that, Mr. Chairman.
Mr. Garrett. I recognize Mr. Kildee for the remaining 5
minutes.
Mr. Kildee. First of all, thank you very much, Mr. DeMarco,
for hanging in there.
And thank you to the chairman and ranking member for
rewarding patience and allowing me a few minutes of your time.
For a few years before I arrived here in Congress, which
was just a couple of months ago, I was the president of a
nonprofit organization dedicated to dealing with vacant and
abandoned property.
I came to that work because for 13 years prior to that, I
was a county treasurer in Genesee County. I was living my
lifelong dream of being the tax collector in Flint, Michigan. I
think you understand what I was dealing with to a certain
extent.
Mr. DeMarco. Yes.
Mr. Kildee. But one of the concerns that I developed and
became much more aware of, especially as I travelled the
country and helped set up land banks--about 100 land banks
around the country that I have participated in arranging,
including the one in my hometown, is the approach that most
systems seem to take when it comes to real estate, and I am
speaking specifically about REO management and disposition.
Systems tend to treat these assets as a commodity at a
marketplace and often measure the value of a transaction in
purely transactional terms and don't ever consider, let alone
attempt to internalize, the sometimes very negative
externalities of those disposition decisions. So I have a
couple of questions that deal with that particular area.
One--and if you could try to be as quick as possible--what
is the status of the Enterprises' REO now as opposed to, say, a
year ago?
Mr. DeMarco. We certainly are reducing the REO inventory,
and one of the things that is contributing to these reported
profits in 2012 is that the return we are getting on these
sales is higher than had been anticipated.
Mr. Kildee. About a year ago--according to this, it was in
February of 2012--there was a pilot program announced that
would take Fannie Mae-owned properties and offer bulk purchases
to investors. I would just ask you to comment on that, but
particularly comment--as I understood it, the intent was to get
property out of your inventory or out of the inventories of the
Enterprises and support what was an increasing demand for
quality rental housing in many of those communities. That was
at least one of the potential outcomes.
How has FHFA or anyone else ensured that the disposition
standards that were the basis for those transactions have been
adhered to by the purchasers?
Mr. DeMarco. Actually, with the pilot program you
referenced, there were a number of restrictions on the
disposition of the properties post-transaction, and so we have
a regime in place to monitor that, but it was something that in
some sense limited the ability of the acquirer in terms of how
they would dispose of the properties.
Most of the properties that were part of these pilot
transactions were properties that were already rented, so
Fannie was the landlord, if you will, for these properties. So
they already had renters in them and we wanted to see that
rental--the property would be preserved as a rental property
for a period of time, and so there were covenants and this
restricted disposition in that way to ensure most of the
properties remained rentals for a number of years.
Mr. Kildee. Is there any data or experience that shows how
successful that has been in terms of the downstream condition
of the properties? Is it working or have there been situations
where purchasers have not adhered to those standards, and has
there been action taken--
Mr. DeMarco. It is a little early yet, since we closed on
the transactions in late summer, but I am not aware of any
problems that have been identified to date.
Mr. Kildee. Was there any specific preference granted to
community-based entities, local land banks, or nonprofit
intermediaries that might take the approach that the
transactional value or even the revenue stream generated by
those properties were not the only considerations, that the
external effect of the condition of the property was also a
consideration?
Mr. DeMarco. Yes, sir. In fact, that was part of it. I
would probably want to have my staff come talk to you about
what the technical details were, but we did have provisions in
there that included partnering with local nonprofits and
housing groups which had familiarity with these markets.
Mr. Kildee. And then finally, specific to REOs held by the
Enterprises, to what extent has it been the case that local
relevant State law or local ordinances have been adhered to
regarding management and the condition of those particular
properties?
Mr. DeMarco. We adhere to State law. Where State law
conflicts with Federal law or the operations of the
conservatorship--we have a couple of instances of that being a
problem, but those have been rare.
Mr. Kildee. Thank you very much.
Mr. Garrett. Thank you.
I believe the ranking member has something to enter into
the record?
Ms. Waters. Thank you, Mr. Chairman. I have here a document
from ESOP, that is Empowering and Strengthening Ohio's People.
I ask unanimous consent to enter it into the record.
Mr. Garrett. Without objection, it is so ordered.
I would like to say thank you to the Director for, as I
said at the outset, your work in this area. Also, thank you for
your testimony today. Thank you for spending a little extra
time so we could get through all of the Members who did have
the patience to stay and ask questions.
And I do also appreciate the comment you made early on to a
couple of the Members that you would follow up on an individual
basis to answer some of those additional questions, so I thank
you for that.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
This hearing is adjourned.
[Whereupon, at 12:44 p.m., the hearing was adjourned.]
A P P E N D I X
March 19, 2013
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