[Congressional Record (Bound Edition), Volume 151 (2005), Part 17]
[House]
[Pages 23286-23287]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           REGULATION OF GSEs

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from New Jersey (Mr. Garrett) is recognized for 5 minutes.
  Mr. GARRETT of New Jersey. Mr. Speaker, I rise tonight to discuss an 
important issue that could, as we know, come before the House as early 
as next week, and that is, the regulation of GSEs, specifically Fannie 
Mae and Freddie Mac, and the impact they have on homeowners or people 
who want to buy a new home, and a tax that it may place upon them and 
the risk that places to the mortgage market in this country.
  Fannie Mae and Freddie Mac were chartered by Congress with the main

[[Page 23287]]

purpose of creating a liquid secondary mortgage market in this country 
and also providing essential affordable housing for lower-income 
families. To help them in this effort, the GSEs have a number of 
benefits, including exemption from State and local taxes and an ability 
to borrow at a discounted rate due to the implied government backing 
they have.
  Beginning in the early 1990s, Fannie and Freddie held a combined $12 
billion, that is, 5 percent, of the single-family home mortgage market 
in their portfolio; but over the last 15 years, this number has grown 
to over $1.5 trillion, about.

                              {time}  1245

  I say ``about'' because I cannot give you a more specific number, 
because it has been years, if not longer, since anyone has known 
precisely what is in their books.
  Fannie and Freddie realized that by keeping a portfolio of the larger 
portion of the mortgages they purchased and by buying back much of the 
MBS they issued, they could make five times as much spread as they 
could by simply securitizing the mortgages that they bought and selling 
the resulting MBS to third parties. However, by keeping a large amount 
of mortgages and MBS on their portfolio, Fannie and Freddie are greatly 
increasing their interest rate and prepayment risk, which leaves them 
very susceptible to interest rate changes.
  To hedge against these possible interest rate changes, Fannie and 
Freddie use various types of derivatives to shift much of the interest 
rates to derivative counterparties. Hedging of this nature greatly 
concentrates interest-rate risk in Fannie and Freddie and a handful of 
large banks and investment firms, and this concentration has created 
what is known as a systemic risk, which Chairman Greenspan has warned 
about.
  The best way to reduce the systemic risk for the economy is by 
limiting the amount of mortgages that Fannie and Freddie can hold in 
their own portfolio.
  Now, I commend the chairmen of the committee, the gentleman from Ohio 
(Chairman Oxley) and the gentleman from Louisiana (Chairman Baker), in 
working to draft legislation to create a new world class regulator to 
oversee Fannie and Freddie. However, I believe that the House bill does 
not go far enough.
  See, the House bill gives a new regulator the authority to dispose of 
any new assets or liabilities of the enterprises if the Director 
determines such action is consistent with safe purposes. Now, while 
this is a step in the right direction, I believe that stronger language 
is definitely necessary. I worry that a new regulator, without specific 
congressional direction to reduce the size of portfolios of the GSEs, 
will face constant political pressures from the GSEs, thus putting the 
possible problems that result on the backs of American taxpayers.
  Now, some argue that if Fannie and Freddie portfolios are curtailed, 
they will not be able to meet their affordable housing goals. But this 
is not the case.
  As the former head of OFHEO noted just last week, ``The amount of 
time and resources that the enterprises must dedicate to managing the 
risks associated with their portfolios is very substantial, and it 
dwarfs any marginal benefit to their affordable housing mission. In 
addition, the recent scandals at both companies illustrate the problems 
they can get themselves into as they try to manage this volatility 
associated with very large portfolios.''
  Limiting the portfolio growth is the number one priority of the 
administration in addressing GSE reform. Chairman Greenspan, Secretary 
Snow, Secretary Jackson and others have all spoken out on the need to 
rein in these large portfolios that exist solely to increase the 
profits for Fannie and Freddie executives and their shareholders.
  In a speech last spring to the Federal Reserve Bank of Atlanta, 
Chairman Greenspan discussed the GSEs' ability to securitize mortgages 
and the benefits that it would have on the housing market and the 
health of the entire economy. He stated, ``The method of GSE financing 
most consistent with our mission is to securitize assets first and to 
hold in their portfolios only those assets that are very difficult or 
unduly expensive to securitize.'' And here is the key part: ``Without 
the needed restrictions on the size of the GSE balance sheets, we put 
at risk our ability to preserve safe and sound financial markets in the 
United States, a key ingredient of support for housing.''
  So in conclusion, Mr. Speaker, legislation that is coming before the 
House next week dealing with GSE, Fannie and Freddie reform is a good 
first step, but is not in the current format something that we should 
support. It will result in a tax on the American taxpayer, it will 
result in a tax on the American who is trying to buy his first house, 
and it will add risk to the already risky mortgage market in this 
country.

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