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Are Fannie and Freddie “Systemically Important”?

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Tuesday titled “Should Fannie Mae and Freddie Mac be Designated as Systemically Important Financial Institutions?” Witnesses included Alex J. Pollock, Distinguished Senior Fellow, R Street Institute; Douglas Holtz-Eakin, President, American Action Forum; and The Honorable Susan M. Wachter, Sussman Professor of Real Estate and Professor of Finance, The Wharton School of the University of Pennsylvania.

In his opening statement, Committee Chairman Mike Crapo discussed the importance of reevaluating the GSE’s place in the mortgage market, noting FHFA Director Mark Calabria’s push to end the conservatorship of Fannie and Freddie.

“In recent weeks, FHFA Director Mark Calabria has repeatedly stated, quoting President Kennedy, that ‘the time to repair the roof is not in the middle of a downpour but when the sun is shining,’” said Crapo in his opening statement. “I agree with this sentiment. We have a key opportunity right now, while the sun shines on our economy and mortgage markets are healthy, to put our housing finance system on a durable, sustainable course that can withstand any market cycle.”

According to Crapo, Fannie and Freddie are too big to fail, and “hold far less capital, and are far more leveraged, than any other currently-designated SIFI.”

The witnesses each answered the question, “are Fannie Mae and Freddie Mac systematically important?” According to Pollock, they are. However, he notes that Financial Stability Oversight Council (FSOC) should designate Fannie and Freddie as SIFIs.

“That would be consistent with the clear provisions of the Dodd-Frank Act,” Pollock stated. “In my opinion, the country needs Fannie and Freddie to be integrated into the efforts to understand and deal with systemic risk. Without including Fannie and Freddie, these efforts are woefully incomplete.”

Holtz-Eakin echoed Crapo’s statement on the GSEs, stating that “Fannie Mae and Freddie Mac continue to be risky, too-big-to-fail institutions,” and notes Fannie and Freddie’s tentative SIFI status.

“Fannie Mae and Freddie Mac were put into conservatorship because they were deemed too big to fail, the very concept that underpinned the creation of the SIFI designation,” said Holtz-Eakin. “Thus, we would automatically expect the GSEs released from conservatorship to be considered SIFIs.”

While Holtz-Eakin and Pollock suggest a SIFI designation, Wachter suggests be designated as Systemically Important Financial Market Utilities (SIFMUs).

“I believe a SIFMU designation is the correct designation because the GSEs provide a structural

foundation to the secondary mortgage market,” said Wachter. “The GSEs are characterized by the considerations established for the SIFMU designation—that is, the aggregate value of transactions processed by the financial market utility, the aggregate exposure of the financial market utility, the relationship, interdependencies, or other interactions of the financial market utility, and the effect that the failure of or a disruption to the financial market utility would have on critical markets, financial institutions, or the broader financial system. All four of these characterize the GSEs.”

View the hearing here.

About Author: Seth Welborn

Seth Welborn is a contributing writer for DS News. He is a Harding University graduate with a degree in English and a minor in writing, and has studied abroad in Athens, Greece. An East Texas native, he also works part-time as a photographer.
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