The regulator of housing finance giants Fannie Mae and Freddie Mac told lawmakers they need to reduce or eliminate the government's near total support for the mortgage market to open the door for private capital and lay the groundwork for a healthier market.
The two companies, which help finance about two-thirds of new U.S. home loans, have been operating under government control since the credit crisis of 2008. They were bailed out at a cost to taxpayers of $131 billion.
Republicans and Democrats agree Fannie Mae and Freddie Mac should eventually be wound down but have yet to concur on what should replace them.
"The U.S. housing finance system cannot really get going again until we remove this cloud of uncertainty and it will take legislation to do it," the regulator, Federal Housing Finance Agency Acting Director Edward DeMarco, told the House of Representatives Financial Services Committee on Tuesday.
"While FHFA is doing what it can to encourage private capital back into the marketplace, so long as there are two government-supported firms occupying this space, full private sector competition will be difficult, if not impossible, to achieve," he said.
Many Democrats believe the government needs to continue playing some role in the mortgage market to help ensure broad access to credit, and a number of private proposals also envision keeping some type of federal backstop in place.
"I have been observing a developing consensus among private market participants that the conforming conventional mortgage market cannot operate without the American taxpayer providing the ultimate credit guarantee for most of the market," DeMarco said.
"That clearly is one policy outcome, but I do not believe it is the only outcome," he said. "I believe it is possible to rebuild a secondary mortgage market that is deep, liquid, competitive, and operates without an ongoing reliance on taxpayers or, at least, a greatly reduced reliance on taxpayers."
Fannie Mae and Freddie Mac do not make loans, but they buy them from lenders to foster a liquid market. They either hold the loans in their own portfolios or repackage them as securities for investors, which they issue with a guarantee.
READY FOR CHANGE
The regulator told the panel he is attempting to simplify Fannie Mae and Freddie Mac's combined book of business, in which the companies own or guarantee about $5 trillion in mortgages. He said a gradual reduction of the government's overall footprint in the market would be a multi-year venture.
Representative Jeb Hensarling, the panel's Republican chairman, said the committee intends to move forward on legislation to coax private capital back into the market and reform the housing finance system.
"I am determined this hearing will be the last time that Director DeMarco ... will testify before this committee before we finally and belatedly mark-up a true GSE reform legislation," Hensarling said.
GSE stands for government-sponsored enterprise, a financial services company chartered by Congress to boost the flow of credit to targeted sectors of the economy, while reducing risk for investors
The ranking Democrat, Representative Maxine Waters, echoed the call for action, saying lawmakers should begin carefully studying the many bi-partisan industry proposals on the table.
A group of senators introduced a bill last week that aims to jump-start housing finance reform. It would prevent Congress from raising the "guarantee fee" the two firms charge lenders and using the funds generated to cover federal spending.
In the absence of action by Congress and the White House, DeMarco assured the committee, he was working to shrink the dominance of Fannie Mae and Freddie Mac while ensuring taxpayers are repaid for keeping the firms afloat.
He said it was time to "start moving the dial away" from almost 90 percent reliance on the government for all U.S. new home loans, and time for taxpayers to start "seeing more of a return on the support that has been provided."
After years of losses, both of the GSEs have returned to profitability and are now set to return earnings to the U.S. Treasury, which could dampen the political impetus for reform.
In a filing with the Securities and Exchange Commission last week, Fannie Mae said it would miss its March 18 deadline for posting quarterly results as it analyzes how to account for certain deferred tax assets, which are unused credits and deductions that can be used to cover future tax bills.
The filing raised the possibility the company could soon be required to send as much as $62 billion to the U.S. Treasury if it begins to account for the assets as part of its net worth.
In the filing, Fannie Mae said the deferred tax assets may have a "material impact" on its 2012 financial statements and result "in a significant dividend payment" to the Treasury.
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