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CNBC "Power Lunch"- Transcript

Interview

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MR. GRIFFETH: Now, let's get on to the story of the day, of course, just a couple days after the federal government took over Fannie Mae and Freddie Mac, Congress planning to hold hearings into the bailout and to determine the future of these two government- sponsored enterprises.

And joining us once again for a First on CNBC interview, we welcome back, once again, the House Financial Services Committee chairman Barney Frank.

Chairman Frank, it's always good to see you. Welcome back.

REP. FRANK: Thank you.

MR. GRIFFETH: You have been one of their strongest proponents in the House, the GSEs. Your feeling is that they should remain the way they have, you know, government sponsored, but publicly traded with profits going to a trust fund to pay for rental housing.

Is that pretty much the story?

REP. FRANK: No.

MR. GRIFFETH: Okay.

REP. FRANK: What I've said is that I do understand that there is attention here that we have to look at. I certainly don't want to see their role diminished right now and I agree with Secretary Paulson, in fact, what he's done is to say we're going to do more of this. But I - well, two things, first of all, for some reason, the president decided to say, oh, well, Congress waited too long to give us new powers. In fact, that was true when the Republicans were in power from '95 to last year, but when the Democrats took over, the first bill that came out of the committee when I became chairman was a bill to increase the powers of regulators over Fannie and Freddie, including conservativeship, essentially, everything that the Secretary of the Treasury was asking for and what was in the final bill.

So we've always felt that it was important to improve the regulation and as soon as we got into power, we did that. Now, going forward I do think the question of the tension between the public and private roles has to be addressed.

MR. GRIFFETH: Right.

REP. FRANK: We will have a hearing soon in about ten days on what's going now. But next year, along with other fundamental questions about the regulation of the financial system we have to look at this.

I think the answer is this: There's a tension between being a private corporation and having a somewhat public housing mission. As is often the case, when things are going well, tensions can be subsumed. As Warren Buffett said though, when the tide goes out you see who has been swimming naked, well, the tide is way out by this subprime crisis and, yeah, I do think going forward we have to decide how and whether to rebalance that.

MS. HERERA: Mr. Chairman, we've gotten a lot of e-mails from viewers who were, you know, seeking income and added either Fannie or Freddie preferred shares to their portfolio and a lot of them did a lot of research. They're reportedly not the speculators that everybody is accusing of making a run on Fannie and Freddie.

Has there been any thought? Or what would you think about perhaps making some of the preferred shareholders, which include some of the big mutual funds out there whole in this transaction?

REP. FRANK: I would say two things. First of all, I have been one of those who have been saying there was no guarantee and I have told people. I did not think people should feel that they were guaranteed. Now, there was some feeling they had to do with debt that the Secretary had, but I have never been one who said, hey, buy this, it's absolutely guaranteed. Secondly, there was a particular problem we have with some of the banks, especially some of the smaller banks who because the preferred is being devalued may have a problem of capital adequacy and I believe it is important that we work with them. Secretary Paulson, in fact, included a reference to that in his statement. But beyond that, look, this is the risk of buying stocks, and again, I will say I had said to people please do not assume that everything here is guaranteed.

MR. KNEALE: Chairman Frank, in the United Kingdom homeownership - there's a higher percentage of homeownership there than in the U.S., yet they don't even have a Fannie or a Freddie the way we do, and in '05, the Fed came out with a report that said seven-hundredths of a percentage point, that's all Fannie, Freddie made the difference in loans that it can back and loans that it can't.

Why do we need them at all?

REP. FRANK: Well, we certainly need them now because as you see the private market has collapsed and they're still there. If you did not have Fannie and Freddie now, you would have a serious problem with housing falling even further. Secondly, they have had the mission of doing not simply market-rate housing, but some affordable housing. They have had goals to lend money to lower income housing and we have put into this bill an affordable housing trust fund. Frankly, I think one of the problems we have in this country is that we push too many people into home ownership when we should have been encouraging some people to stay renting and people who bought homes who shouldn't have bought the homes.

So there's a social element that we want to do and not leave it entirely in the market and we also see now that if we did not have this, you would be in much worse shape and I think that's what Secretary Paulson recognizes and Chairman Bernanke, you mentioned the Fed, but he's very much in favor of saying at this point in this set of market conditions. If we did not have Fannie and Freddie, we would be in much worse shape in housing, and consequently, in the entire economy.

MS. CARUSO-CABRERA: And sir, move forward now. Let's say we get past this hump. Fully private? Nationalized? Hybrid? Which one?

REP. FRANK: I think what we should do is next year is have very serious discussions with all parties and figure out how best to do it, and I would not want to prejudge what we do and I don't want to say now, oh, here's what we think so people come in and tell us what they think.

I do want to maintain an element of being able to subsidize housing for low and working class people because I think that's an important part of it, especially in parts of the country where house prices have gotten too high.

MR. GRIFFETH: Speaking of which and, you know, plenty of people are asking themselves, okay, so the government has seized control of these two entities. What does it mean to me as a homeowner whether I'm facing foreclosure or not? You were just in Stockton, California, I think, it was last weekend, which has been called the foreclosure capital of the United States to kind of view the damage there and to hold some hearings.

In your view, what can you tell homeowners in this country the meaning of this seizure of Fannie and Freddie and whether it benefits them or not? Or is this just a revenue neutral event for the majority of homeowners in this country?

REP. FRANK: Well, for the majority it's going to be revenue neutral, but for a minority it will be very helpful and for nobody will it be hurtful. It will be helpful in two ways, first of all, we did pass a bill that encourages, it doesn't mandate because we can't abrogate contracts, encourages the holders of the loans to write them down in the principal so that the borrower can now get an FHA guarantee, refinance, et cetera. Having Fannie and Freddie around to buy those after the FHA guarantees them is very important because you would otherwise have a problem.

So it's going to help with our foreclosure avoidance effort. Secondly, Fannie and Freddie under the duality that we've been talking about, they were moving in directions that were raising mortgage costs given their need to be a private corporation. They were raising some fees. They were cutting back on some of their purchases. What Secretary Paulson and Lockhart have explicitly said is they're going to move in the opposite direction.

So whether you're in a situation now where you're in the foreclosure mode and we're trying to help you get out of it, yes, having Fannie and Freddie around should facilitate that, and secondly, for people who are going to be going forward getting mortgages, this has already led to some drop in rates and it will have some impact in lowering the cost of buying housing going forward during this interim period.

MR. GRIFFETH: Chairman Frank, always good to have you with us. Thank you, sir. Barney Frank, the chairman of the House Financial Services Committee in Washington.


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