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House Subcommittee Hears Analysis Of GSEs' Housing Role
WASHINGTON (3/7/13)--The House Financial Services subcommittee on capital markets and government-sponsored enterprises (GSE) proceeded with its study of government housing policy Wednesday even though Washington, D.C. was all but shut down due to a winter storm emergency.

Although the hearing was titled "Fannie Mae and Freddie Mac: How Government Housing Policy Failed Homeowners and Taxpayers and Led to the Financial Crisis," witnesses seemed to agree to varying degrees that the two government-sponsored housing enterprises did play a role in contributing to the housing crisis and financial meltdown. However, their outlook and proposals for GSE reform varied.

As witness Susan Wachter put it in her testimony, the GSEs contributed to the crisis and were "part of the irresponsible expansion of credit" both before and after 2007. However, she said other entities were "far more responsible for the riskiest product originated and securitized."  Wachter is the Richard B. Worley Professor of Financial Management, Professor of Real Estate and Finance, and Co-Director, Institute for Urban Research, for The Wharton School of University of Pennsylvania.

"There is, in fact, a simple way to measure the success or failure of the GSEs, relative to other entities. All we have to do is examine default rates. The GSEs' delinquency rates were far below those of non-GSE securitized loans," Wachter said.

John Ligon, policy analyst for the Center for Data Analysis of The Heritage Foundation, said the GSEs should go back to how they did business prior to the 1990s. In fact, he said, the relaxation of lending standards in the U.S. mortgage market overall "started in earnest" in the 1990s.

Lawrence White, the Robert Kavesh Professor of Economics, Leonard N. Stern School of Business, of New York University, said there are two lessons to be learned from the experience of Fannie and Freddie, which now operate under conservatorship under their regulator, the Federal Housing Finance Agency.

First, White said, the federal government should learn to be extremely wary of situations where the financial markets assume that the U.S. Treasury will come to the rescue of a financial institution's creditors. Second, he added, "large systemic financial institutions--in this case, involved with residential housing finance--must be subject to rigorous prudential regulation, with high capital requirements at the center of this regulation. Anything less is an invitation to a repeat of this costly experience."

Josh Rosner, managing director of Graham Fisher & Co., the fourth witness at the hearing, said the country's financial collapse likely would not have been avoided even if the if the GSE's followed "more responsible" housing policies during the time.

Credit unions were not mentioned in the hearing testimony.


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