Thank you, Secretary Mnuchin, for calling this meeting of the FSOC, particularly on this important topic. I appreciate the extensive efforts of the staff in conducting this review, and I support the statement on the secondary mortgage market.
Homeownership is part of the American Dream. The GSEs play a central role in the $11 trillion single-family mortgage market, helping many consumers achieve their dream of owning a home. As the dominant participants in the secondary mortgage market, they provide the liquidity needed by lenders to provide affordable housing options to consumers. Financial stability and access to credit may be imperiled if the GSEs cannot perform this role effectively. It therefore is critical that we take steps to mitigate that risk.
The Council’s activities-based review of the secondary mortgage market and related recommendations support FHFA’s efforts to promote the safety and soundness of the GSEs under Director Calabria. The GSEs were significantly undercapitalized in the lead-up to the 2008 recession. This was largely due to the perception by their investors that there was an implicit government guarantee of each GSE that its competitors did not have. This competitive advantage incentivized GSE risk taking and growth, resulting in the market dominance that necessitated federal assistance when the GSEs’ solvency was at risk.
In considering the future of the GSEs, we need to avoid policies that provide incentives for the GSEs to engage in excessive risk-taking and that put consumers on the hook for that risk-taking.
The FHFA proposal prescribing a robust capital framework is a significant step toward these goals.
While higher capital requirements under the proposal may effect mortgage costs in the near-term, they will help create a more competitive secondary mortgage market whereby private market participants will be able to compete with the GSEs on a more level-playing field. Competition is a critical means of improving consumer welfare. More competition among firms should lead to lower mortgage rates for consumers over the longer-term. More competition should also facilitate innovation in the mortgage markets to provide consumers with new, beneficial financing options that are not available today.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.