Kerpen to Financial Services Committee: Stop Delaying Fannie Mae / Freddie Mac Wind Down

July 21, 2011 J

Today Americans for Prosperity’s Phil Kerpen sent a letter to the House Financial Services Committee urging them to get to work on winding down Fannie Mae and Freddie Mac. Recent efforts from some of the Committee’s members, including a handful of Republicans, would only needlessly delay the important reforms to the nation’s housing finance system and stall the complete elimination of the two failed mortgage giants.

The complete text of the letter is posted below. Proceedings of the committee markup discussed in the letter can be found here on the Committee website.

July 21, 2011

The Honorable Spencer Bachus
Committee on Financial Services
2129 Rayburn House Office Building
Washington, DC 20515

The Honorable Barney Frank
Ranking Member
Committee on Financial Services
B301C Rayburn House Office Building
Washington, DC 20515

Dear Chairman Bachus, Ranking Member Frank, and Members of the Committee:

While there is widespread agreement that Fannie Mae and Freddie Mac represent a failed and costly model that must be eliminated, policymakers cannot agree how to go about gradually phasing out the two mortgage giants or on what should replace them. Some fear that eliminating the GSEs will leave a vacuum in the mortgage market with no private capital available to pick up the slack and provide financing for millions of current and would-be homeowners.

Recent efforts by Rep. John Campbell (R-Calif.) serve as a prime example. As you know, the Subcommittee on Capital Markets and Government Sponsored Enterprises recently marked-up a series of bills that would wind-down the government’s support for Fannie Mae and Freddie Mac. In two of the bills, Mr. Campbell added language that would require a “viable private secondary market” to be in place before any of the reforms could occur.

He defined a “viable private secondary market” as one in which $250 billion in residential mortgage loans were sold and securitized quarterly by non-agency sources. But with the notable exception of 2005 and 2006 (during the height of the housing bubble), private label securitization has rarely even come close to originating $250 billion in a quarter. Data from the Federal Housing Finance Agency shows that in the first quarter of 2011 private label securitization was in the neighborhood of only $10 billion in originations. In this context, Mr. Campbell’s threshold is transparently unrealistic, and would therefore be an impediment to reform.

If legislators are waiting for housing markets to recover and a “viable private secondary market” to emerge before eliminating these two failed mortgage giants, they’ve got it backwards. The housing market will remain anemic and private capital will sit on the sidelines until Fannie Mae and Freddie Mac are history. Only after they are eliminated will proper incentives exist for a private secondary market. Private label securitization accounts for only 3 percent of the market right now precisely because private issuers are crowded out and cannot compete with the funding advantages that these government-backed behemoths enjoy. Phasing out the ultra-subsidized (and now government-owned) GSEs will necessarily precede a housing recovery and a flow of capital into completely-private residential mortgage lending markets, not the other way around.

Congress needs to get to work reforming the housing finance markets immediately, and those efforts must start with a gradual, predictable, and complete elimination of Fannie Mae and Freddie Mac. Language like that offered by Mr. Campbell may be well intentioned, but would have the unacceptable effect of protecting the status quo.


Phil Kerpen
Vice President, Policy
Americans for Prosperity

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