During his testimony this week before the full House Financial Services Committee, U.S. Department of Treasury Secretary Jack Lew stated when asked about GSEs and the conservatorship that the system should be restructured, but the time was not right for the conservatorship to end.
Lew was testifying before the House Financial Services Committee on the 2015 Annual Report of the Financial Stability Oversight Council (FSOC). When questioned by Representative Ed Royce (R-California), who has been a strong advocate of ending the FHFA's conservatorship of Fannie Mae and Freddie Mac and paying GSE dividends to taxpayers instead of Treasury, Lew said he thought GSE reform should take place, but disagreed as to the ending of the conservatorship.
"The damage done to our economy by the housing crisis was far more than the simple amount of money that was put into the GSEs, and I think Americans are still healing from the pain of that financial crisis," Lew said. "I think the right thing is to do GSE reform and to get on to a new restructured system, but it is not the right time to be talking about ending the conservatorship or paying dividends."
Here are five takeaways from the hearing titled "The Annual Report of the Financial Stability Oversight Council":
- GSE Reform: "There is a common security platform being built and it's something that could be expanded beyond the GSEs and be available more broadly. I think the more that we're able to lay a foundation that a private securitization market can be built on, the better off we'll be."
- Government's Role in Mortgage Market: "Comprehensive legislation" should address the FHFA's conservatorship of the GSEs, and that the future role of the federal and state governments in mortgage markets be clarified.
- Core Challenges: Lew said that "Core challenges exist" with regards to improving house finance infrastructure and reducing taxpayer risk: "The GSEs remain in conservatorship, subject to FHFA supervision, with the vast majority of newly originated mortgages carrying a federal government backing either through the GSEs, the Federal Housing Administration, or other government-backed programs. The Council’s report includes a number of recommendations to reduce the GSE’s exposure to mortgage credit risk."
- Common Ground: During his five-minute questioning period, Royce found the common ground with Lew's statement on GSE reform, saying, "I think we can move forward on that GSE reform concept."
- Criticism of the FSOC: Committee Chairman Jeb Hensarling (R-Texas) was highly critical of the FSCO in his opening statement, saying that "When Democrats first passed the Dodd-Frank Act five years ago, they claimed the Financial Stability Oversight Council was one of its crown jewels. FSOC, whose agency heads largely failed in the last crisis, would now be able to clearly identify risks to financial stability and take action before these emerging threats metastasized into another crisis. But a fatal flaw in this pipe dream was always the failure, perhaps the deliberate refusal, of Dodd-Frank’s supporters to recognize that among the greatest threats to financial stability are Washington policies themselves, including policies of the very agency heads that sit on the council."
Click here for the archived webcast of the hearing.