May 26 2011

Shelby: The American Taxpayer is No. 1 Priority

U.S. Senator Richard Shelby, ranking Republican on the Senate Committee on Banking, Housing and Urban Affairs, today made the following statement at a Committee hearing on the Public Proposals for the Future of the Housing Finance System.

Excerpts of Shelby’s statement are immediately below in bold, followed by the full text of his prepared remarks:

“Our once dynamic and innovative housing market is now stagnant and damaged, crippled by regulatory uncertainty.

“Unfortunately, when market participants should be focusing on reviving our housing markets, Washington has forced them to devote countless hours and millions of dollars to navigating the scores of new regulations imposed by Dodd-Frank

“Nearly all of the risk in our housing market is being transferred from private capital to the American taxpayer.  This is a wholly unacceptable situation.

“Today we will hear from two very different points of view on how to address this situation.  One side will argue that our mortgage market needs the Federal government to continue guaranteeing mortgages in one form or another….The other side of the argument raises concerns with the Federal government’s domination of the mortgage finance market.

“I agree that many factors must be considered as we proceed with reform.  I maintain, however, that protecting the American taxpayer must continue to be our number one priority.”

 

STATEMENT OF SENATOR RICHARD C. SHELBY

Committee on Banking, Housing and Urban Affairs

May 26, 2011

 

“Thank you, Mr. Chairman.

“Today, the Committee will continue its examination of proposals for reforming our nation’s housing finance system.  There is no dispute that our housing finance system is broken. Since 2006, housing starts have fallen by 67 percent, while existing home sales have fallen by nearly 13 percent in just the last year. Likewise, home prices continue to decline in most markets.  The latest median price of an existing home is more than 17 percent lower than in 2008.  Our once dynamic and innovative housing market is now stagnant and damaged, crippled by regulatory uncertainty.

“Unfortunately, when market participants should be focusing on reviving our housing markets, Washington has forced them to devote countless hours and millions of dollars to navigating the scores of new regulations imposed by Dodd-Frank.  Accordingly, it should be no surprise that our housing market has not rebounded since the passage of that Act.  By some measures it is even worse because our private markets have been almost completely replaced by government programs.

“Last year, the Federal government accounted for 96% of all mortgage-backed securities issued.  In effect, Fannie, Freddie and FHA now occupy what used to be the private secondary-mortgage market.  As a result, nearly all of the risk in our housing market is being transferred from private capital to the American taxpayer.  This is a wholly unacceptable situation. 

“Today we will hear from two very different points of view on how to address this situation.  One side will argue that our mortgage market needs the Federal government to continue guaranteeing mortgages in one form or another.  This means that the American taxpayer will continue to guarantee mortgage backed securities while collecting a guarantee fee.  It is not surprising that certain segments of the housing market advocate such a model.  Most businesses like government subsidies if they can get them.  And the housing industry is no different.

“However, the Federal government does not have a good track record on pricing risk and thus, these subsidies are not without cost.  Indeed, Secretary Geithner warned this Committee in March, when he stated:  “…guarantees are perilous. Governments are not very good at doing them, not very good at designing them, not very good at pricing them, (and) not very good at limiting the moral hazard risk that comes with them.”  Given the combination of these difficulties, we cannot assume a government guarantee of mortgages can be achieved without risk to the taxpayer.  While a government guarantee may be a good deal for the housing industry, it could be a very bad deal for the taxpayer.

“The other side of the argument raises concerns with the Federal government’s domination of the mortgage finance market.  We have heard from many witnesses over the years that the government must remain engaged in the market because of concerns with private sector capacity.  We must ask, however, whether the reduced role of the private sector is a result of market conditions or conditions created by government policies.  Surely we should answer this critical question before we draw any conclusions about the wisdom of continued government involvement in the mortgage market.

“Mr. Chairman, I agree that many factors must be considered as we proceed with reform.  I maintain, however, that protecting the American taxpayer must continue to be our number one priority.

“Thank you.”