Lockhart Testifies On GSEs

s of the housing and mortgage industries, including representatives from the Federal Housing Finance Agency (FHFA), the National Association of Realtors and the Mortgage Bankers Association, testified before Congress yesterday to discuss the status of the government-sponsored enterprises (GSEs). FHFA Director James Lockhart talked about three potential roles that Fannie Mae and Freddie Mac could fulfill moving forward: liquidity provider of last resort of the secondary market for mortgage-backed securities (MBS) and other asset-backed securities, guarantor or catastrophic risk insurer of the credit risk of conventional MBS, or provider of subsidies for increasing the supply or reducing the cost of mortgage credit to targeted borrowers. Lockhart said the "old, hybrid model" poses too much systemic risk, and notes that five principles must guide the GSEs' future structure: [list]The GSEs or any successors must have a well-defined and internally consistent mission; *There should be a clear demarcation of the roles played by the federal government and the private sector as they relate to the secondary mortgage market; *The GSEs or their successors must provide guarantees or insurance on "sound insurance principles," which Lockhart said include strong management, underwriting and capital positions, as well as risk-based pricing and flexibility; *The structure must ensure risk-taking is prudent; and *Housing finance should be supervised to contain both the riskiness of individual institutions and systthe systemic risks associated with housing finance. [/list] As for specific ownership structuring of the GSEs, Lockhart said there are three options: government agency, GSE or fully private. A proposal for the GSEs-as-agencies calls for them to merge with FHA and Ginnie Mae. Lockhart's opposition to nationalization is based on the belief that government insurance programs are "particularly high risk and rife with moral hazard." Current market difficulties make permanent nationalization irrational, he added. Maintaining the current GSE form prevents the government from being placed in a first-loss position, among other benefits. "Extreme care would have to be taken to prevent the inherent conflict always present in the GSE model – the tension between private profits, in part from publicly bestowed benefits, and public purposes," he commented. Private firms hold operational efficiency advantages over the other structures, he said, and they could offer increased consumer benefits. "However, to maintain the level of liquidity the MBS market has enjoyed under Fannie Mae and Freddie Mac, a high degree of standardization and quality control across firms would be necessary." SOURCE: House Committee on Financial S


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