Policymakers See GSE-Free Future as Freddie Asks for $6B

The head of the agency that regulates the GSEs addressed one lawmaker's recent proposal to eliminate the federal lifeline for ""Fannie Mae"":http://www.fanniemae.com/portal/index.html and ""Freddie Mac"":http://www.freddiemac.com/ Thursday even as the latter filed staggering third-quarter losses and requested another $6 billion in taxpayer funds.

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""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) ""Acting Director Edward DeMarco"":http://www.fhfa.gov/Default.aspx?Page=67 and several others testified before the House Subcommittee on Capital Markets, which heard the chief regulator describe why the federal government needs to slowly phase out taxpayer support for the GSEs.

""The Enterprises cannot operate indefinitely in conservatorship, and I look forward to further consideration of housing finance reform options,"" he said in opening remarks, hewing close to the ""preserve and conserve"" mandate handed down to the FHFA by Congress during the financial crisis.

He touched on a ""recent bill"":http://garrett.house.gov/News/DocumentSingle.aspx?DocumentID=266462 sponsored by ""Rep. Scott Garrett"":http://garrett.house.gov/ (R-New Jersey) that would remove federal funds for the GSEs by calling it one of several floated by policymakers, and one in which the transition still needs to be worked out.

Asked what the mortgage market looks like without the GSEs, he responded by saying that ""it looks like one where the risk is priced to actually what it is"" for fixed-rate mortgages.

Earlier Thursday Freddie Mac announced that it had suffered a net loss of $4.4 billion, the steepest ever, along with derivative and credit losses amounting to $4.8 billion and $3.6 billion, respectively. A filing with the ""Securities Exchange Commission"":http://sec.gov/ signaled that it intended to shore

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up the shortfall by requesting another $6 billion in taxpayer funds.

The stunning loss for the GSE follows a tumultuous shakeup at the top of the mortgage company, with the FHFA ""recently announcing"":https://themreport.com/articles/leadership-shakeup-underway-for-freddie-mac-2011-10-26 resignations by CEO Ed Haldeman, the board chairman, and several board members.

If passed, the Garrett proposal would remove federal funds for the GSEs and entrust an array of mortgage classification, securitization, and underwriting requirements to the FHFA itself.

During the hearing, ""Rep. Barney Frank"":http://frank.house.gov/ (D-Massachusetts) criticized the role that any one federal agency would play by undertaking new responsibilities in the mortgage market on an ""indefinite basis.""

DeMarco fielded few signs of opposition to the bill and called ""credible"" one option from an earlier ""Treasury Department"":http://www.treasury.gov/Pages/default.aspx white paper while he skirted queries about new mortgage and financial products.

""I don't believe the model of having Fannie Mae and Freddie Mac in conservatorship is conductive to introducing new products,"" he said. ""So I think the market framework that would allow for innovation and the introduction of new instruments would better happen outside of the realm that we're in today.""

Policymakers joined the discussion by alternately criticizing and praising any attempt to remove federal guarantees from the mortgage market.

""Peter Wallison"":http://www.aei.org/scholar/58, Arthur F. Burns Fellow with the conservative-leaning ""American Enterprise Institute"":http://www.aei.org/home, called for a reduction in ""the government's role in the housing market by turning as much as possible over to the private sector"" in favor of private investors seeking to pool their wealth for mortgage-backed securities.

""Janneke Ratcliffe"":http://www.americanprogress.org/experts/RatcliffeJanneke.html, a senior fellow with the left-leaning ""Center for American Progress Action Fund"":http://www.americanprogress.org/, dismissed the Garrett proposal by calling it one that ""does not offer a viable replacement for the GSEs.

""Nonetheless, I agree it is time to get moving, test an approach such as this, and start building a new private mortgage market that is efficient and sustainable,"" she said.