Testimony Before the House Financial Services Committee
As Prepared for Delivery
Chairman Hensarling, Ranking Member Waters and members of the Committee, thank you for inviting me to appear at this hearing.
Before getting into the details of my testimony, I wish to highlight my main theme: The mortgage system we have today is fundamentally better than the one we had ten years ago, plain and simple. It is more safe-and-sound, more efficient and does a far better job of protecting taxpayers. Freddie Mac is similarly much better, with a substantially improved business model. We are absolutely not the government-sponsored enterprise (GSE) of the past.
Working closely with the Federal Housing Finance Agency (FHFA) and at times the U.S. Treasury, we spent a good part of the last decade addressing what are widely regarded as major weaknesses of the pre-conservatorship GSE business model. We have also worked, and continue to work, to address material and costly inefficiencies in a mortgage system that has long been well known for being behind the times. The results have helped borrowers, renters, lenders, investors and mortgage market participants more broadly – and, most of all, the U.S. taxpayer.
These improvements also have paved the way for policymakers considering the future of housing finance.
My testimony is divided into four parts.
First, I will briefly discuss how we have served our Congressionally-mandated mission over the past ten years.
Second, I will set out the four major weaknesses of the pre-conservatorship housing finance system, and what we have done to address them. They were: (1) large investment portfolios used to enhance profits with subsidized funding, (2) an inadequate capital regime, (3) a bias towards large lenders, and (4) a massive concentration of mortgage credit risk in the two GSEs. The changes we have made to address these weaknesses are creating a fundamentally different and better housing finance system.
Specifically, working with FHFA, we have:
Reduced our retained investment portfolio by more than 70%, and repurposed it to support the core mission under the Charter, rather than to generate discretionary profits.
Created a modern, SIFI-consistent capital framework to enhance safety-and soundness and enable our decision-making to be in the true interest of taxpayers.
Leveled the playing field for community banks and other small lenders.
Created entirely new markets to efficiently transfer most of the credit risk of both single-family and multifamily mortgage guarantees to private capital markets – on a cost-efficient basis and structured so that it is nearly certain that the risk transfer will be completed as intended.1 My testimony will particularly highlight the creation of the credit risk transfer (CRT) markets, arguably the single most important development in the housing finance system over the past decade. Freddie Mac has played a well-recognized leadership role in that development, in both the single-family and multifamily businesses.
Essentially, CRT has created a greatly improved business model for the GSEs; we now buy and distribute most of the credit risk of new guarantees instead of simply holding it. It has successfully put a large and ever-growing amount of private capital at the heart of the mortgage system to absorb losses before taxpayers could be called upon to cover them. That has clearly been a top priority for many working on housing finance reform. This change in business model also has the potential to reduce Guarantee Fees (G-Fees) over time, and has already substantially reduced the systemic risk to the U.S. financial system represented by what prior to CRT was an extreme concentration of mortgage credit risk.
Third, I will discuss our efforts to improve the efficiency and safety and soundness of the mortgage finance system, especially through technology-based innovation. The mortgage industry had long been inefficient in ways that harmed borrowers, renters, lenders and investors. I will note that those efforts are in support of the statutory mission given to us by Congress, within the four corners of our charter and fully approved by the FHFA as our conservator and safety-and-soundness regulator.
Finally, per the Committee's specific request in its invitation to testify, I will provide some brief comments regarding housing finance reform.
I come to the conclusions in my testimony based on my background, my experience with the pre-conservatorship GSEs, my experience running Freddie Mac for the past six years and my fiduciary responsibility to the FHFA and taxpayers.
In terms of my background, I am a career financial services executive with broad experience, over four decades long at this point, in wholesale banking and capital markets, both domestic and international, as well as U.S. retail banking and the securities industry. I gained this experience after spending almost 30 years at JP Morgan Chase and its predecessors, rising from a trainee to being one of its top three executives, retiring in 2004. I later served as Chairman and then CEO of E*TRADE during the Financial Crisis, and was also appointed to the Board of American International Group (AIG) by the U.S. Treasury as part of its rescue of the company.
And while my career was outside of the specialized mortgage finance system, I did become very familiar with Freddie Mac and Fannie Mae, dealing with them routinely in both the capital markets and in the mortgage lending business. As a result, I saw first-hand what was good in their activities. In particular, they helped preserve relatively inexpensive mortgage loans for the broad middle and working class, with the 30-year, fully-amortizing fixed-rate loan as its core component.
However, I also saw critical flaws that eroded public confidence in the GSEs, as discussed above and more fully below. For these reasons, I am in no way an apologist for the pre-conservatorship GSEs. Quite the opposite; only by admitting their weaknesses can we effectively address and materially reduce them.
Moreover, as the CEO of a company in conservatorship that receives capital support from the U.S. Treasury, I have publicly stated from my first day that I took my position as a form of public service. In fact, as mentioned above, my fiduciary responsibility is not to private shareholders but to FHFA as our conservator, and behind it the American taxpayer. I take that responsibility very seriously.
I accepted the challenge of leading Freddie Mac with the understanding that the conservatorship would not maintain the flawed status quo. Instead, FHFA would actively reform the GSEs – to build upon the good and to remedy the flaws, as much as possible under current law. So, I am here to talk about the Freddie Mac and the GSE housing finance system as they exist today, after the extensive work we have done during the ten years of conservatorship to improve them within the laws on the books today and under the policy directives given to us by FHFA as our conservator. The result has been substantially improved safety and soundness and efficiency of the company and the entire housing finance system, along with substantially reduced taxpayer exposure to our risks.
These efforts are vitally important to borrowers, renters, lenders, investors or anyone else with a stake in a liquid, stable and affordable housing finance system. They are unarguably vital to protecting taxpayers. And, they should be important to any policymaker considering the future of housing finance.
Read Don Layton's full testimony as prepared for delivery here.
1 An explanation of the issue of transaction completion certainty is on page 12 of the full testimony.
©2022 by Freddie Mac.
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