The future of Fannie Mae and Freddie Mac were the subject of testimony on Capitol Hill Wednesday before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.
Congressman Paul E. Kanjorski (D-PA), the subcommittee’s chairman, convened the hearing to “focus on the many strategies that Fannie Mae, Freddie Mac, the Federal Housing Finance Agency, and the Treasury Department have employed to limit capital infusions into the two housing enterprises.”
Kanjorski noted in his opening remarks that in order to stabilize the U.S. housing markets, the Treasury Department has to date purchased or announced plans to buy just under $150 billion in the senior preferred stock of the enterprises combined. Moreover, according to a June report issued by the Federal Housing Finance Agency, the Treasury Department and the Federal Reserve have together purchased $1.36 trillion in the mortgage-backed securities of the two institutions.
“Some of my colleagues may try to use today’s hearing as an opportunity for political grandstanding. They, however, need to remember that people who live in glass houses should not cast stones,” Kanjorski cautioned. “Under the leadership of former Chairman Mike Oxley, we tried for several years to enact bipartisan legislation to improve the regulation and activities of Fannie Mae and Freddie Mac. Unfortunately, many Republicans in Congress and officials in the Bush Administration blocked these efforts. Their delays allowed the housing crisis to fester into an ulcer.”
Edward J. DeMarco, acting director of the Federal Housing Finance Agency, testified that work is underway to develop projections that are comparable between the enterprises.
“There are some differences between the Enterprise-generated results and the results from the FHFA-directed exercises, but consistent with my previous statements, even under severe stress scenarios, Treasury draws remain under $400 billion,” he said. “In less severe stress scenarios, losses are much less than that.”
In a recap of the crisis that led to the hearings, Assistant Secretary for Financial Institutions Michael S. Barr noted the GSEs were allowed to operate under an unacceptable “heads I win, tails you lose” system. They enjoyed the benefits of the perception of government support. They had inadequate oversight and inadequate capital, and the market did not instill appropriate discipline at Fannie Mae and Freddie Mac because the market assumed that they had a government backstop.
“The events that led the last Administration to need to put the GSEs into conservatorship was symptomatic of a range of regulatory, management, and oversight failures throughout our financial system,” he said.