Janet Yellen to Congress: Get GSE Reform Done

Janet Yellen added the voice of the Federal Reserve to the growing call for Congress to move swiftly to decide the future of Fannie Mae and Freddie Mac.

Yellen told the House Financial Services Committee during a hearing yesterday that it was “very important” for Congress to create a new system that will address the future of government sponsored enterprises, which currently finance more than 90 percent of all residential mortgages in the United States.

“I think we still have a system that has systemic risk, that government funding remains critical to the mortgage sector, and I think to get the housing market back on its feet, it’s important for Congress to put in place a new system and to explicitly decide what the role of the government should be in helping the housing sector.”

Erika Reynoso Senior Communications Manager Financial Services Roundtable

Erika Reynoso
Senior Communications Manager
Financial Services Roundtable

Yellen’s comments over the course of yesterday’s hearing mirrored much of what we’ve been hearing from the Obama administration and many leading lawmakers on Capitol Hill, especially the need for housing finance entities that won’t put taxpayers’ money at risk.

Currently, taxpayers would be 100 percent financially responsible if the housing market suffered another significant downturn.  A collapse of the housing market could result from anything that impacts consumers’ spending habits, including an unexpected terrorist attack.

We continue to wait for Senate Banking Committee Chairman Tim Johnson (D-SD) and Republican Ranking Member Mike Crapo (R-ID) to release a draft of the bipartisan that they’ve been crafting for several months.

At a recent FSR event, “The Policy and Politics of GSE Reform,” lead panelists Senators Bob Corker (R-TN) and Mark Warner (D-VA) said that keeping the GSEs in conservatorship is no longer a viable solution and that a new system that allows private capital to absorb more of the risk needs to be formed.  GSE reform legislation released by the two lawmakers last summer includes these elements, as well as a last-resort government backstop guaranteeing taxpayer protection.

The Corker-Warner bill is expected to be modeled closely in the upcoming Johnson-Crapo legislation.

While some opponents of GSE reform argue that Fannie and Freddie are turning record profits, Counselor to the Secretary for Housing Finance Policy Director Michael Stegman recently remarked that Fannie and Freddie’s earnings may be “significantly overstate” the true financial status of the enterprises. Significant portions of the earnings are the result of one-time tax reversals, litigation settlements and investment portfolios that are mandated to shrink over time.

We at FSR hope to see the release of the Johnson-Crapo draft by sometime in the next few weeks, if not sooner.

Author Erika Reynoso is FSR’s Senior Communications Manager

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