Michael D. Berman, CMB, vice chairman of the Mortgage Bankers Association (MBA), has testified before the House Financial Services Subcommittee on Capital Markets, Insurance and the Government Sponsored Entities at a hearing titled, "The Present Condition and Future Status of Fannie Mae and Freddie Mac."
Below is Mr. Berman's oral testimony, as prepared for delivery.
"Every part of the real estate finance industry was deeply impacted by the financial crisis which led to the conservatorship of Fannie Mae and Freddie Mac: large and small lenders, servicers, investors, multi-family lenders and most importantly, consumers. A smoothly functioning secondary mortgage market is not only important for our industry, but for the entire economy.
"Despite their financial situation, the GSEs currently participate in over two-thirds of all single-family mortgage transactions and about seventy-five percent of all multifamily mortgages. While the FHA also facilitates a significant share of residential mortgages, the GSEs currently are the prevailing force in the market.
"In addition to falling housing prices and an unprecedented foreclosure crisis, the GSEs face severe management challenges. At the same time, they are being used as instruments of public policy. While MBA supports the temporary use of the GSEs in this manner, this is an unsustainable and artificial business model. We are committed to working with you to create a new structure for the future.
"But before we discuss the future, we must ensure that the current market works as efficiently as possible. For example, the credit facilities established by Treasury for the GSEs expire at the end of this year, as does Treasury's authority to purchase GSE mortgage backed securities in the open market.
"We must ensure these important programs are extended at least until the economy recovers.
"Congress should also help make mortgage credit more available and affordable by permanently raising the GSE loan limits. The higher loan limits have benefited consumers but, because they are temporary, investors have been hesitant to purchase high balance loans. This dilutes the full benefits of the higher loan limits because liquidity is artificially restricted. Ultimately, consumers are forced to pay higher interest rates on their loans.
"After the conservatorship was announced, MBA convened a council of mortgage finance experts from every part of the real estate finance industry to examine these issues. The Council on Ensuring Mortgage Liquidity, which I am privileged to Chair, has identified the key ingredients of a functioning secondary market, and established a set of principles for you and the policy community to consider when debating how to build the secondary market of the future.
"Our approach has been to examine the issues so that stakeholders could assess options in a measured, thoughtful manner.
"We agreed early to avoid an overly prescriptive approach and instead to assess the market and present alternatives, which we plan to refine in the coming weeks and months.
"I have attached a white paper on this issue to my testimony that has been cited as one of the most helpful compilations of options available today. This paper presents a set of building blocks to aid in understanding and discussing the merits of various market structures. It also lists and begins to describe nine alternative models for channeling government support to the housing finance system.
"I have also attached a set of guiding principles based on the key considerations mentioned in the white paper. The scope of these principles is the entire secondary market, including the responsibilities of private market participants and the role of the federal government.
"I hope to address our principles in greater length during the question and answer period, but let me close with a few thoughts to help guide the policy discussion moving forward.
"First, secondary market transactions should be funded by private investors seeking market returns who understand, accept, and are held accountable for the risks they take.
"Next, in order to attract consistent levels of private capital from a wide range of investors, MBA believes there is a role for an explicit federal government credit guarantee on mortgage-related investments in the core single-family and multi-family products. There is also a clear role for government as a liquidity backstop in times of market distress.
"Finally, a careful, measured approach should be adopted so that current markets are not further destabilized. Safeguards should be established to ensure a smooth transition from the present to whatever future model is developed.
"Thank you for the opportunity to appear before you, and I am happy to answer any questions you may have."
A full copy of Mr. Berman's written testimony can be found by clicking here.
For more information, visit www.mortgagebankers.org.