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GSE Mortgage Portfolios
We are gratified that H.R. 1427 does not mandate the draconian cutbacks mandated by last year's Senate bill, S.190. But, as the head of National Association of Home Builders pointed out a few weeks ago, this bill would allow the regulator to compel the same massive portfolio cuts as the Senate bill. Because our ability to invest in mortgages is a critical tool for achievement of our mission, we, like the Home Builders, would like to see revision of the bill to prevent such an outcome. Our PositionWe strongly disagree on the view that the GSE mortgage portfolios are too big and uniquely risky, but do agree that the regulator should have clear authority to ensure that our investment portfolios be operated safely and soundly and in compliance with our charters. BackgroundWhy do we say that the portfolios are critical to our mission? Our charter gives us the obligation to ensure the liquidity, stability, and affordability of mortgage credit across the country, in good times and bad. We fulfill these obligations through intermediating mortgage assets, largely through securitization, but also – because the demand for mortgage assets is volatile and unpredictable – through supporting demand through purchases of mortgages for our portfolio. The portfolios contribute to our mission even when we are not buying, because investors know we will provide a "backstop bid" and buy their mortgages if they later need to sell. This helps keep markets liquid and mortgage rates low across economic environments. AffordabilityRecently, we have heard that only 30 percent of our portfolios fulfills our affordable housing mission. We respectfully disagree with this characterization as too narrow a view of our mission, as well as the contributions we make to affordable housing. First, since we can only invest in mortgages permitted by our charter, by definition every mortgage asset we invest in is mission-related. Every mortgage asset, whether a whole loan, multifamily security, or mortgage revenue bond, fulfills at least one of our mission purposes of providing liquidity, stability and affordability. The same can be said of investments in Freddie Mac's own mortgage-backed securities. We do concede the difficulty of quantifying the additional mission benefit of investing in securities we have already guaranteed, but our constant presence and scale provides ongoing liquidity in our securities, helps keep rates low, and ensures a back-stop bid for mortgages in times of market volatility. As the chart below shows, we estimate that about two-thirds of our retained mortgage portfolio either directly or indirectly supports the affordable component of our mission. This "affordable" share is comprised of a number of different investments: bonds financing low-cost housing (including the $1 billion in MRBs we bought to help rebuild the Gulf Coast); goal-qualifying whole loans and non-agency securities; non-goal-qualifying mortgages and securities supporting first-time homebuyers and/or minority families; and affordable mortgages contained in Freddie Mac securities.
SizeAnother argument is that the GSE portfolios are too big. While the GSEs, have in the past, comprised a relatively larger share of the overall market, this is not true today. Numerous investors compete vigorously for mortgage assets, and as a result both companies' share of U.S. residential mortgage debt outstanding (MDO) has dropped significantly, while the MDO share for competing investors has grown dramatically. At the end of 2003, Freddie Mac held about 8.5 percent of MDO, and Fannie Mae just under 12 percent. Data released by Federal Reserve Board last week showed that MDO was nearly $11 trillion as of the end of 2006. Of that amount, the shares of MDO held by Freddie Mac and Fannie Mae were less than 7 percent for each – down approximately 40 percent from three years ago. In contrast, the mortgage portfolios of the five largest depositories grew by 29 percent in the last year alone. The largest of these portfolios is now approaching half a trillion dollars and in total these depositories hold more than $1.6 trillion in mortgages. This is more than 14 percent of MDO, a larger share than the GSEs combined.17
Several observations can be made from these data. First, the large banks also hold large mortgage portfolios, collectively larger than the GSEs. Second, the data show that mortgage risk is already widely dispersed throughout the global economy, with the seven largest mortgage investors together owning less than 28 percent of MDO. This is not a criticism of the banks. In our view, the key question is not size per se, for us or for the banks. It is whether we are able to manage the risks of our businesses without jeopardizing our financial safety and soundness. With respect to mortgage risk, our track record is second to none. Even in the darkest days of our accounting problems, the low volatility of our risk measures evidenced that we manage mortgage risk conservatively and successfully. A final source of opposition to the GSEs' retained portfolios is that they are profitable, and that is true. However, profits are indispensable to the GSE model. Profits are what allow us to be private sector institutions, using private-sector methods and private capital, to respond to market realities. It is our hope that this candid explanation helps the Committee understand why we are extremely apprehensive about how the regulator might exercise his authority over the retained portfolios. OFHEO's Director has been very open about his view that the portfolios are too big and uniquely risky. We respectfully but strongly disagree on this question. We do, however, agree that the regulator should have clear authority to ensure that our investment portfolios (and those of the FHLBs for that matter) be operated safely and soundly and in compliance with our charters.
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