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Hearing of the Capital Markets and Government-Sponsored Enterprises Subcommittee of the House Financial Services Committee - Mortgage Market


Location: New York, NY

Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, delivered the following opening statement today at a field hearing in New York City to examine the steps Congress can take to facilitate continued investor demand in the U.S. mortgage market without a government guarantee:

"Three years ago today, mortgage giants Fannie Mae and Freddie Mac were placed into conservatorship by their federal regulator. $170 billion in taxpayer bailouts later, these two entities continue to bleed billions of dollars of losses each quarter with no end in sight.

"Both of these companies, combined with FHA, guarantee or insure roughly 95% of the U.S. housing market. At a time when this country is facing a debt crisis, the last thing we should do is permanently add an additional $11 trillion of exposure to the federal government. There is widespread agreement that the government cannot and should not back our entire mortgage market.

"I realize that winding down these two companies must be done appropriately, over time, to ensure a smooth transition to a new system--backed by private capital. But we need to begin that transition now; waiting will only make it more difficult to transition by ensuring market participants are more reliant on the government.

"That is why we are here today in the world's financial capital, New York City, to examine ways to encourage private investment to re-enter our nation's mortgage market and ensure that a robust level of private investment will remain in our mortgage market without a government backstop.

"There are a number of reasons why private investment has been slow to return to our housing sector. First and foremost, I believe the government's expanded role in the mortgage market has acted as a hindrance to private capital returning. When issuers can fund mortgages more cheaply by using the taxpayers, it is not surprising that they choose to go that route.

"At the end of this month, an extremely modest drop in the conforming loan limit is set to occur. This will show that private capital can fill that segment of the market and that rates will not skyrocket for those borrowers, as some would have us believe. This will be a good, but small and necessary, first step toward weaning the mortgage market off of full government support.

"However, in order to make significant headway in our efforts to move the secondary mortgage market back to the private sector, we must reform the private securitization market and make sure that investors feel comfortable returning to a marketplace where they had so many bad experiences in recent years.

"I believe one negative aspect of the securitization market that could be improved upon is the lack of transparency of the market. Too many times during the housing run-up, investors were sold securities where the underlying collateral specifics were not properly shared, were rushed into purchasing bonds without having time to review them and did not have the prices of other trades on similar products available. By providing investors more transparency and additional disclosure, I believe investors will be more willing to return to our mortgage market.

"Another area that needs to be addressed is the lack of legal clarity for investors. Unfortunately, the rule of law has come into question a number of times over the last several years and many investors have had their rights trampled on in the aftermath of the housing bubble. For investors to feel comfortable investing in our private securitization market, there must be legal clarity and conflicts of interest between various parties must be mitigated.

"Finally, I believe that increased standardization and uniformity within our securitization market will help drive long-term and robust investment. Even with Fannie and Freddie's many faults, I do believe they provide some benefits to the marketplace through their standardizing of underwriting criteria as well as governing documents of the securities. I believe that if this uniformity was replicated in the private securitization market, the market would be become much more liquid and many investors from around the world would feel comfortable participating in that market.

"I look forward to hearing the testimony from our esteemed panel today on specific steps that Congress can take to advance these ideas and fix the so called "plumbing' of the securitization market. I am also interested in discussing ideas to facilitate the creation of a private To-Be-Announced market by replicating the homogeneity and uniformity provided by the GSEs.

"On one final side, but related, note, there have been recent disturbing news reports that the Obama administration is contemplating using the GSEs to conduct a back door stimulus program by forcing the breaking of legal contracts and requiring the GSEs to forfeit their legal standing on claims to banks that sold them faulty loans. This would potentially subject the GSE's to billions of dollars of additional losses, the bill of which will go directly to the American taxpayer.

"Fannie Mae and Freddie Mac are not two new toys that the administration can use to test and try various new social policy experiments. They are two failed companies that played leading roles in helping cause the financial crisis and they need to be wound down to protect taxpayers going forward. At a time when we are trying to get private investment back into our housing market, the last thing we need to do is give investors another reason not to buy U.S. mortgages.

"Thank you and I look forward to the witnesses' testimony."

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